In his State of the Union address last week, U.S. President Biden renewed his call for prescription drug price controls.
He didn't argue for the policy on the merits. Instead, he tried to tug on our heartstrings by relaying the story of a 13-year-old boy with Type 1 diabetes named Joshua, who was in the Capitol audience that evening.
"For Joshua, and for the 200,000 other young people with Type 1 diabetes," Biden said, "let's cap the cost of insulin at $35 a month so everyone can afford it . . . And while we're at it let Medicare negotiate lower prices for prescription drugs."
Making medicines more affordable is a worthy goal.
However, price controls of the sort Biden is calling for will reduce access to life-saving drugs — even as they ignore the real sources of high out-of-pocket costs for patients.
Pharmaceutical firms routinely spend billions of dollars over several years in order to research and develop new cures and treatments. But that level of investment only makes sense if companies have some control over the price of each of their inventions — at least for the few years before a drug goes generic.
The government doesn't "negotiate" with drugmakers; it makes pharmaceutical companies offers they can't refuse, thus, it effectively dictates prices.
The prospect of price controls would make the risks involved in drug development impossible to justify. As a result, funding for pharmaceutical research and development would dry up, and medical breakthroughs would grow increasingly rare.
According to University of Chicago economist Tomas Philipson, in fact, a price control scheme similar to the one Biden outlined in last week's speech would reduce the number of new drugs by as many as 342 over the next two decades or so.
Moreover, the idea that America needs to reduce overall prescription drug spending isn't borne out by the facts.
Drugs account for just 12% of U.S. healthcare spending, according to data from the Organisation for Economic Co-operation and Development. That's relatively low among developed nations. Indeed, Germany, France, Ireland, and Canada all devote a larger share of healthcare spending to prescription drugs.
Further, prescription drugs are among the few goods or services whose prices are holding steady, even as overall price inflation surges. Last year, prescription drug prices were flat. In 2020, they actually fell 2.4%, according to the Bureau of Labor Statistics (BLS).
It's also the case that spending on medications tends to reduce long-term healthcare costs by helping patients manage chronic diseases and avoid expensive hospital stays and procedures in the process. So Biden's obsession with how much Medicare — or the nation as a whole — spends on prescription drugs is at best a distraction.
Of course, high out-of-pocket drug costs — including insulin costs — are a problem for the patients who have to deal with them. But for the most part, pharmaceutical companies aren't to blame. Simply forcing companies to cut their prices won't solve the problem.
Rather, it's pharmacy benefit managers (PBMs) — firms hired by insurers to administer their drug plans and bargain with pharmaceutical companies — who are largely responsible for inflating patients' out-of-pocket costs.
These entities have gotten incredibly good at extracting massive rebates from drug manufacturers in exchange for listing them on their formularies of approved medications.
The value of these discounts exceeded $175 billion in 2019.
In the case of insulin, pharmaceutical companies often submit to rebates of 70% or more.
Yet PBMs and insurers rarely share those savings with patients in the form of lower out-of-pocket costs. Instead, they keep those rebates for themselves, or use them to modestly lower overall insurance premiums.
That doesn't help the customer struggling to pay for his prescription at the pharmacy.
He still has to cover his share as a percentage of the drug's undiscounted "list price."
If Biden wants to help people afford the medicines they need, he should focus his energy on reining in pharmacy benefit managers PBMs and insurers who knowingly fleece patients by keeping their out-of-pocket drug costs artificially high.
A new system of drug price controls will only let these middlemen off the hook while destroying market incentives for drug innovation. That's an outcome that no American should applaud.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is "False Premise, False Promise: The Disastrous Reality of Medicare for All," (Encounter Books 2020). Follow her on Twitter @sallypipes. Read Sally Pipes' Reports — More Here.
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