Drug Pricing Reforms Rest On A Fatal Misdiagnosis

President Donald Trump has repeatedly told lawmakers that if they pass a drug pricing bill, he’ll “sign it into law without delay.”

Congress is well on its way to doing just that. The House approved a sweeping drug-price package, led by Speaker Nancy Pelosi, D-Calif., at the tail end of last year. And a similarly ambitious plan from Oregon Democrat Ron Wyden and Iowa Republican Chuck Grassley is currently under consideration in the Senate.

Unfortunately, both seemingly ambitious plans adopt an anti-free market approach to reform. They adversely assume drug companies are driving up prices in order to maximize profits. And they believe socialist, restrictive government price controls are the answer.

This culminates in being a complete misdiagnosis. As a new study from the Berkeley Research Group reports, the true driver of rising U.S. drug costs isn’t drug companies — it’s insurers and pharmacy benefit managers. And if lawmakers really want to save patients money, without penalizing the source of medical research, it’s time to set their sights on these middlemen gaming the system.

Lawmakers are rightfully concerned about how much patients spend at the pharmacy counter. Out-of-pocket drug costs have skyrocketed in recent years. In 2018, Americans paid a massive $439.6 billion for brand medicines at the point of sale, compared to only $268.7 billion in 2013.

Many in Congress assume drug firms are greedily benefitting off these burdensome cost hikes. And 80 percent of Americans share that same sentiment, according to a recent Kaiser Family Foundation survey.

That’s simply not true. As the Berkeley Research Group study shows, even as patients spend more on drugs, the share flowing to drug companies steadily declined by 12.5 percentage points between 2013 and 2018. By contrast, the share retained by insurers, PBMs, and other supply chain entities grew by 12.5 percentage points over that same period. Today, nearly half of brand medicine spending goes directly to them.

In recent years, drug manufacturers have more aggressively tried to reduce drug list prices. They routinely offer generous discounts and rebates to insurers, in exchange for receiving preferred placement on drug plans. In 2018, the value of these rebates totaled $166 billion.

So, the question remains… where do all these savings go? 

While PBMs pocket a portion, insurers receive the majority of the pot. Insurers, in turn, use the rebates to modestly lower premium costs. But since those savings are spread across millions of beneficiaries, they only amount to a couple of dollars saved per month.

Lowering premiums — in any amount — is never a bad thing. But it doesn’t actually help Americans each time they have to pick up a prescription at the pharmacy counter. That’s because insurers base patient co-pays and co-insurance fees off of the medicine’s pre-discounted price — not the much lower deal secured by PBMs.

Here’s how the scheme works. Say a popular blood pressure medicine has a list price of $300. A PBM might negotiate a 50 percent discount, dropping the price to $150. But since insurers aren’t required to share that discount with the patient, they get away with charging a co-pay based on the drug’s full price. That means an unaware patient with a 25 percent co-pay would be forced to cough up $75 out of pocket, when they should only be allowed to pay $37.50.

Inexplicably, none of the “reforms” currently gaining traction in Washington would actually crack down on this insurance-industry’ greedy self-dealing scheme. Instead, they would punish drug companies with strict price controls and taxation schemes designed to dry up industry revenues.

Such anti-free market reforms not only fail to remedy the real problem behind rising drug prices, they would also destroy medicinal innovation. Inventing a new medicine is a high-risk, high-reward enterprise. The vast majority of potential pathbreaking new medicines never even make it out of the lab. In large part because of this high failure rate, the average drug costs ascend to $2.6 billion and take a staggering 10 to 15 years to develop.

Without continuous revenue, drug firms won’t be able to afford the research and development necessary to pursue cures. That means the next generation’s medical breakthroughs — perhaps a cure to cancer, Alzheimer’s, or even a novel antibiotic drug — could die in obscurity, never to leave the lab.

Washington lawmakers are right to prioritize reducing prescription drug costs. But instead of vilifying the industry that’s revolutionizing medical innovation, it’s time for Congress to crack down on the self-serving middlemen that boost their bottom lines and line their own pockets at the expense of patients.

Stone Washington is a member of the National Center for Public Policy Research’s Project 21 black leadership network and is currently studying in the Juris Master Program at the Emory University Law School. He previously served as a journalism fellow at The Daily Caller and is an alumnus of the Heritage Foundation Young Leaders Program.