California wants to get into the drug making business.
Gov. Gavin Newsom just announced his intention to have the state contract with generic drug manufacturers to make drugs to sell to state residents, presumably at lower cost than they’re available on the market today.
But the plan won’t deliver much in the way of savings. In fact, it could cost taxpayers a significant amount of money. There are far more effective ways to make prescription drugs more affordable — say, by injecting transparency into the notoriously opaque drug supply chain.
Generic drugs are already quite affordable. Ninety-five percent of prescriptions for generic drugs cost $25 or less. Generics are also the bulk of the American drug market, accounting for 9 in 10 prescriptions filled.
In other words, there’s not much room for generic drug prices to decline further. If Newsom’s new drugmaker is going to undercut existing generic prices, it will have to sell its wares at loss-inducing prices. These losses will be compounded by the additional costs the state will incur monitoring its new drug retailing entity.
The taxpayers of California will be forced to cover these losses. Since the vast majority of generics are affordable right now, it makes little sense to foist additional costs onto California’s taxpayers, who are already among the most heavily taxed residents of any state in the country.
So the governor’s plan won’t make drugs more affordable. Changing the way medicines are sold in this country will.
Take insulin. The list price for Humalog U100, an oft-prescribed insulin product, rose 52% from 2014 to 2017. Price increases like this one feed the narrative that “out-of-control” capitalism is forcing diabetics to choose between food and their medicines — and that the government needs to forcibly control drug prices to ensure people have access to them.
There are some problems with this narrative. While list prices for insulin have been growing, the average price per patient that insulin manufacturers have been receiving has been declining — by approximately 8%.
In other words, patients are paying more even as manufacturers are taking in less money. This seemingly contradictory outcome is enabled by something called the “gross-to-net bubble.”
The gross price is a list price set by manufacturers before they begin negotiating with insurers. The net price is the ultimate cost that insurers pay after all the negotiations with all the various parts of the drug supply chain. The gross-to-net bubble refers to the widening gap between these two prices.
An inflating gross-to-net bubble means higher profits for all those middlemen in the supply chain. But that’s bad for patients, whose co-pays and co-insurance are typically tied to the more expensive gross prices even though their insurers’ costs are tied to the lower net prices.
Patients without insurance often face the highest costs of all, as they derive no benefit from the lower net prices.
Markets only work when prices are meaningful and transparent. What’s happening in the drug market is just the opposite. Transforming the industry supply chain to a transparent net-price model will deflate the gross-to-net bubble — and effectively lower the costs patients must pay for their medicines.
There are additional inefficiencies in our drug supply chain that merit fixing. Consider the case of insulin again. Generic versions of the hormone exist. But they’re often excluded from many formularies — the list of drugs approved for coverage by a patient’s insurer. Removing such barriers to lower-cost medicines — particularly the lower-cost biosimilars that compete against the most expensive biologic products — can meaningfully reduce costs for patients and overall health care expenditures.
Like all Americans, Californians are desperate for more affordable prescription drugs. But a state-run generic retailer won’t deliver that outcome. The state would be better served if the governor tabled this idea and instead pursued reforms that eliminated the perverse incentives that currently plague the drug market.
Wayne Winegarden, Ph.D., is the director of the Center for Medical Economics and Innovation at the Pacific Research Institute. To read his research on drug pricing reform, visit www.medecon.org