The best way to tackle drug prices
President Biden and Democrats in Congress are turning their attention to their infrastructure plan, which curiously includes components that have nothing to do with rebuilding roads and bridges. Among the provisions in the plan, House Speaker Nancy Pelosi has suggested the system of price controls on prescription drugs could be included, while Senator Bernie Sanders has recently unveiled similar health care legislation.
Lowering prescription drug prices is a laudable goal. Last year, Americans paid some $350 billion for medicines last year, a 200 percent jump since 2000. But lawmakers would be wise to cure the disease rather than treat the symptoms. The devil is in the details. The plan from Democrats, which largely mirrors legislation that was passed last year by the House, would cap the domestic prices of prescription drugs to a proportion of what the foreign countries pay for the same product. It seems logical on paper but, in practice, the strategy will have broad unintended effects. The patients the policy intends to assist will get the short end of the stick.
Countries like Britain and Canada that will be part of the indexing group have fallen for the trap of health care run by the government, the system that artificially suppresses drug price levels. If the United States were to peg the domestic price tags to these foreign markets, revenue would dry up for our drug manufacturers. According to the Congressional Budget Office, firms could lose up to $1 trillion over the next decade.
It may be difficult to feel sympathy for drug companies. They are often painted as the bad guy. But that lost revenue would directly translate to fewer products brought to market as research and development budgets dwindle, which would then rob patients of innovative new therapies and treatments. The Council of Economic Advisers of the last administration estimated 100 fewer medicines would become available during the next decade. It could also weaken our leadership in the drug innovation arena, giving China and our other global competitors an upper hand.
Instead of trying to mandate lower drug prices through government edict, our lawmakers have to focus on the root cause of why drug prices are so high. Addressing pharmacy benefit managers would be a first step. These middlemen of the health care world essentially dictate what prescription drugs are covered by health insurance plans and are substantially stocked on pharmacy shelves. The role which pharmacy benefit managers play is not inherently bad, but they now have learned over time how to game the system more and more to profit from the backs of consumers.
Drug manufacturers offer discounts and rebates with their products as an incentive for pharmacy benefit managers to provide access to the market. An honest fee for services is welcome. However, when pharmacy benefit managers were given an inch, they took a mile. Instead of passing along at least some of the financial savings already provided by drug companies to patients at the pharmacy counter, they eat it up. Middlemen collected more than $160 billion in discounts and rebates in 2018 alone.
Encouraging drug discounts to be applied at the point of sale, rather than intercepted by middlemen, should be a priority of Congress. It would help rein in runaway prescription drug costs without slowing the spigot of new pharmaceuticals coming to the market. Americans enjoy the most cutting edge medical treatments in the world. The system is not perfect, however, we must also avoid throwing the baby out with the bathwater.
Tom Price, a former secretary of Health and Human Services and a former member of Congress, is a senior policy fellow at the Job Creators Network.
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