Competition, not capping increases, is the cure for high drug prices

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Soaring prescription drug prices are putting financial pressure on families across the country. In response, state legislators are increasingly considering limits on the annual price increase of prescription drugs. But rather than making drugs more affordable, these policies risk reducing consumer access to cheaper, generic alternatives.

In an effort to slow the ongoing rise of prescription drug prices, lawmakers in Maryland created the country’s first state prescription drug affordability board in May of 2019. Among other powers, the board will be able to review and cap the price of generic prescription drugs if they increase by 200 percent or more for patients covered by public state insurance plans. The law also extends to any prescription drug whose price would create vague “affordability challenges” for the state health care system or its patients.

Following Maryland’s lead, lawmakers and bureaucrats in Hawaii, Colorado, and Connecticut are expected to consider creating their own drug affordability boards. In addition to affordability boards, some states are also pursuing “transparency” and “price gouging” legislation, which sound appealing and well-meaning, but do nothing to stimulate more competition in the marketplace.

While the proposals are no-doubt fueled by good intentions, the impact on consumers could be disastrous. Generic prescription drugs are a lifeline for countless Americans and driving them out of the market risks leaving them without a viable alternative. According to an April report by the AARP, the price of commonly used generic drugs are on average 18 times cheaper than their brand-name equivalents. While a 200 percent price increase would appear to represent a major rise in cost, it could be an insignificant amount relative to the brand-name alternatives.

The importance of cheaper, generic alternatives to consumers cannot be overstated. In a competitive drug market, Americans consistently vote with their wallets. At least 90 percent of prescriptions filled are for generic alternatives, and yet generic drugs represent less than a quarter of prescription drug spending. The proof is in the savings as, according to research by IQVIA, lower-cost generics have provided consumers, taxpayers and the health care system with almost $2 trillion worth of savings over the last decade.

Furthermore, in addition to depriving consumers of cheaper alternatives, price controls introduce a variety of secondary negative consequences by altering the incentives of firms in the market. A report by the American Consumer Institute demonstrates how artificially capping the price of prescription medication would decimate innovation and development in the world’s most vibrant medical research industry.

Similarly, proportional price caps weaken the incentive for firms to lower their prices. According to a report by the Department of Health and Human Services, generic drug prices fell by more than 60 percent between 2008 and 2014 while brand-name prices more than doubled in the same period. If generic prices cannot oscillate up and down with changes in the economy, it diminishes the incentive to ever cede lower prices because it cannot be easily reversed.

Based on the sheer size of the benefits that price competition has provided to American consumers, lawmakers should be actively trying to drive down costs by injecting more competition into the market. Simply put, addressing the cause of rising drug prices is better than treating the symptoms. For example, it can take years to receive FDA approval to bring generic drugs to market.

In addition to a long FDA approval process, there are a number of obstacles to biosimilar and generic drug competition – even after FDA approval. For instance, there are currently 26 biosimilar drugs approved by the FDA, but only half are actually available in the market. A report from the White House’s Council of Economic Advisors shows that streamlining this approval process has helped to slow the rise of the cost of prescription drugs—while also giving consumers more choice.

Legislating price controls will not work. Instead, when it comes to prescription drugs, the focus should be on encouraging price competition rather than trying to mitigate price increases. By introducing more market rivalry and eliminating regulatory bottlenecks, drug manufacturers are made to work harder for every dollar American consumers spend on prescription drugs.

Oliver McPherson-Smith and Steve Pociask write for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.

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