DRUGMAKERS AREN’T DRIVING INFLATION

BROAD SPECTRUM

DRUGMAKERS AREN’T DRIVING INFLATION —AND PRICE CONTROLS WOULD HINDER MEDICAL INNOVATION

By Dana Goldman and Erin Trish As inflation has worsened, the Biden administration and its allies have focused attention on an old bogeyman: reducing prescription drug prices. Democratic Sen. Joe Manchin of West Virginia recently told an AARP gathering that “If we do nothing more this year, that’s the one thing that must be done.” On NBC’s Meet the Press, former Treasury Secretary Lawrence Summers singled out government negotiation of drug prices as one of the “most important” policies to control inflation.

It’s time for a reality check. The consumer price index rose 8.6% in May compared with a year earlier. Household spending on prescription drugs rose only 1.9% over the same period. In the last quarter of 2021, net prices for medicines— after subtracting rebates, discounts and fees—dropped 0.7%, the largest quarterly decline in 15 years. If other products such as eggs (up 32%), gasoline (up 49%) and used cars (up 16%) had behaved like drugs, inflation would be completely under control.

Drug prices are an attractive political target, but the campaign to control them relies on a misunderstanding of how they work.

Large pharmaceutical benefits managers, or PBMs, negotiate prices with drug companies on behalf of insurers and employers. In exchange for placing drug companies’ products on insurance formularies, PBMs secure billions of dollars in rebates to pass on to patients. The problem is, they often keep those rebates to themselves. The net effect is that consumers pay more than they should.

Insulin is a prime example. PBMs have pocketed outsize rebates while makers of insulin products have seen their net prices decrease. Meanwhile, higher copays are becoming prohibitively expensive for some patients. In March, the House approved a $35-a-month cap on insulin copays for patients on Medicare or in private insurance plans, and the Senate was considering a matching bill.

Capping out-of-pocket costs makes sense. That is, after all, what insurance is designed to do. But capping list prices— as some in Congress have proposed— makes no sense, and wouldn’t effectively tamp down inflation. Instead, such a restriction would perversely encourage manufacturers to launch new drugs at higher prices (since they can’t raise them in the future) and discourage innovation.