As each new year begins, the increases in the list prices of drugs are announced. And, following these announcements, the political class complains that something must be done. This year, following the price announcements, Speaker Nancy Pelosi tweeted “Enough is enough” while Senator Grassley emphasized that a “call to action” on drug prices is needed.
Undoubtedly, there are real problems. Unfortunately, the politicians seem more interested in espousing simple talking points rather than effective actions that would simultaneously promote innovation and affordability.
In the 2020 edition of this drama, politicians are bemoaning the 5 percent increase in drug prices that has been implemented according to consulting firm 3 Axis Advisors. A 5 percent price increase at a time when inflation is running at less than 2 percent sounds nefarious, and appears to support the outrage of the political classes. Despite the headline, average drug prices were not raised by 5 percent.
There are important caveats to the findings. For example, according to the report, the average price increase of 5 percent was relevant for “hundreds of medicines”. There are, however, over 20,000 approved prescription drug products available in the U.S. according to the FDA. Therefore, the average price increase must also account for those drugs where no price increase was taken.
Take Pfizer’s price increases as the example. Pfizer raised prices on about 27 percent of its drugs by an average of 5.6 percent. This means that there was no price increase (or in some cases price decreases) on the remaining 73 percent of Pfizer’s drugs. Therefore, the average price increase across all Pfizer drugs was, at most, 1.35 percent – or below the rate of inflation. The same logic holds for the entire drug industry.
Perhaps more important, the reporting assumes that the price increases are the actual prices paid on behalf of patients. But, this is not the case. The prices cited in the report (and discussed above) are the list prices announced by manufacturers. Once manufacturers announce these list prices, Pharmacy Benefit Managers (PBMs), on behalf of insurers, negotiate discounts and rebates. The prices actually paid on behalf of patients are the resulting net prices that includes these discounts and rebates. Discounts have been growing faster than list prices for several years now, which means that the net prices of drugs have been actually declining for years.
Declining net prices are consistent with the national health expenditure data, which shows that expenditures on prescription drugs grew 2.5 percent in 2018 compared to a 4.6 percent increase in overall health expenditures. This pattern also held over the past 5-year and 10-year timeframe.
So, what does all of this mean?
Since the list prices are not the actual transaction prices, focusing on the changes in list prices is not helpful for addressing the problems afflicting the costs of drugs. Instead, policy should focus on several core issues that are actually driving the problems.
First, many patients are exposed to unlimited out-of-pocket expenses on drugs. Capping patients’ out-of-pocket costs, which are too-often tied to the drug’s list price not the more relevant net price, is a key reform that will limit the potential financial exposure for patients.
Second, the opaque pricing system is creating adverse incentives that inflate expenditures, often at the expense of patients. Improving the system’s price transparency, ideally moving to a net-price model, can ensure that patients are the ones who directly benefit from the discounts negotiated on their behalf. A more transparent pricing system will also create better incentives that will empower patients and their doctors to prescribe the right medicine at the right price.
Finally, biologic medicines, or the cutting-edge medicines that treat cancer and auto-immune diseases, are expensive and, for those patients who need them, can be unaffordable. These are also the medicines driving many of the unaffordable medicine stories. Competitors to the expensive originator biologic medicines, known as biosimilars, exist but their use is currently being discouraged by the opaque pricing system. Removing these barriers and encouraging greater use of these lower cost biosimilars will meaningfully reduce the costs of some of the most expensive biologic medicines.
The best way to solve the problems with the drug market is to implement reforms that directly target the flaws of the current system. The annual outrage over the increases in the meaningless list prices fails this criterion and is a distraction that erects unnecessary impediments to implementing effective reforms that would actually solve the problems afflicting the pharmaceutical market.
Dr. Wayne Winegarden is director of the Center for Medical Economics and Innovation and senior fellow in business and economics at the Pacific Research Institute.