To lower drug costs in 2019, ignore Elizabeth Warren

Will 2019 be the year that lawmakers finally address prescription drug prices?

Not if they follow distracting and counterproductive proposals like the one made by Democratic presidential primary candidate Sen. Elizabeth WarrenElizabeth Ann WarrenKrystal Ball: Elites have chosen Warren as The One; Lauren Claffey: Is AOC wrong about the Electoral College? Poll shows Biden, Warren tied with Trump in Arizona McConnell rejects Democrats' 'radical movement' to abolish filibuster MORE (D-Mass.) last month to get the government into the drug manufacturing business. Warren's Affordable Drug Manufacturing Act would create an Office of Drug Manufacturing that would manufacture select generic drugs at a "fair price."

In typical Warren argot, she justifies her proposal by claiming, “In market after market, competition is dying as a handful of giant companies spend millions to rig the rules, insulate themselves from accountability, and line their pockets at the expense of American families.”

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The federal government can't even run the post office or the DMV, yet Warren wants it involved in the enormously complex process of generic drug production. While she implies that eliminating profits and pricing drugs at cost will generate savings, historical experience in every industry shows that the profit motive is the only way to keep costs low.

Yet even if the government could somehow efficiently control the means of drug production, Warren misdiagnosis the generic drug market, which for the most part functions well, dramatically increasing the affordability and accessibility of lifesaving treatments. Generics provide Americans with nine out of 10 of their prescriptions, yet make up only 23 percent of their total spending on drugs.

On a range of the most popular and effective drugs, including Lipitor, Prilosec, and Zofran, generic equivalents have cut the price by around 95 percent to mere pennies per dose. About 90% of generic copays are under $20. A 2016 Government Accountability Office report found that prices for generic drugs in Medicare Part D declined 59% from the first quarter of 2010 to the second quarter of 2015. Even by Warren's elastic definition of the word, this pricing is certainly fair.

Because generic drug manufacturers don't need to recoup research and development (R&D) and advertising costs, they only make a marginal profit above the cost of manufacturing.   

Warren points to a handful of well-publicized examples of generic drugs like insulin where the list prices have skyrocketed in recent years. Yet these examples do not indict the entire generic drug market but rather the drug distribution channels that are filled with middlemen actually responsible for these price increases.

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Consider: While the list price of insulin has more than doubled since 2011, the net price has remained flat. What's the difference between the list price and the net price? The net price includes the billions of dollars of rebates that drug manufacturers pay to pharmacy benefit managers (PBMs), which are middlemen between manufactures and insurers. Rebates are estimated to make up about one-third of total list prices, according to the Berkeley Research Group, and are responsible for nearly all of the list price increases of recent years.

Why do drug manufacturers pay these dramatic rebates? Because they need to in order to get on insurance plan formularies, whose vast scale allows generic drugs to be profitable. At PBMs' behest, competition among drugmakers to offer ever-greater rebates to access these preferred drug lists is the driving force behind list price increases.

“Generic drugmakers simply stop making the drugs if they don’t get a sole-source contract [from the PBM],” explains Philip Zweig of Physicians Against Drug Shortages. “It’s a winner-take-all game.” This Soviet-style dynamic — not anything inherently to do with the generic drug market — is at the root of any Warrenista "competition is dying" analysis of the drug market.

In theory, these rebates to PBMs are supposed to be passed on to patients in the form of lower drug prices. In practice, they drive up list prices and are partially used by insurers to lower overall employer plan costs. While lower premiums are nice, this is cold comfort for the sick patients who pay significantly more for their prescription drugs as a result. Under this system, the sick subsidize the healthy.

If Warren were serious about addressing rising drug costs to improve patient access, she'd start with this — in the words of FDA Commissioner Scott Gottleib — "Kabuki drug pricing." Yet the role middlemen play in driving up drug costs is complicated, and politicians — especially of Warren's ilk — prefer to demagogue. And there is no more simple-headed solution to any policy problem than "just get the government to do it."

Terry Wilcox is the co-founder and executive director of Patients Rising.