One of the centerpieces of the Build Back Better Act (BBBA) passed by the House last year was drug pricing legislation, which could be included in the next version of the BBBA, now renamed the Inflation Control, Climate and Deficit Reduction Bill. While headline inflation is at an alarming rate, with the most recent 12-month reading at 8.5%prescription drugs are experiencing some of the lowest levels of inflation for various goods and services.
The price control legislation is very wrong in itself. Government-fixed prescription drug pricing is not a solution to today’s runaway inflation, and moreover, it would itself create new problems.
Drug pricing provisions in the House-passed BBBA would allow the government to set prices for a number of drugs under Medicare Part D, among other changes, and President Biden has presented the provisions as a means of tackling the current inflation. According to the Bureau of Labor Statistics (BLS), however, prescription drugs are experiencing relatively low levels of inflation, up 2.2% over the past 12 months. Prescription drugs even fell month-over-month from February to March this year, and drug price inflation has been below average inflation for the past four years (see charts below). -seals). In other words, changes in the price of prescription drugs are not a driver of the record levels of inflation we are currently experiencing.
Demand-side factors likely explain some of the recent slower growth in drug prices. The new drug prescriptions tracked by the IQVIA Institute were at 76 percent from their pre-COVID-19 levels in 2020, due to reduced demand for physician visits and elective procedures during the pandemic.
Official estimates may overestimate inflation by ignoring quality improvements. Research of Seidu Dauda, Abe Dunn and Anne Hall explains that the BLS does not adjust health care sector prices for quality, which could mean that official inflation estimates may not reflect declines in quality-adjusted prices in the area. Their estimates state: “Contrary to official statistics which suggest that medical care prices increased by 0.53% per year relative to economy-wide inflation from 2000 to 2017, we find that prices quality-adjusted medical care declined by 1.33% per year over the same period. period.”
Furthermore, while the official estimate of inflation uses transaction prices rather than list prices to account for negotiated discounts, the measure does not take into account adjust for discounts. Thus, a more comprehensive measure would show even lower inflation for drug prices. The IQVIA Institute tracks the manufacturer’s net price of drugs, accounting for all discounts and rebates, and finds prices actually fell 2.9% in 2020.
From 2009 to 2018, according to the Congressional Budget Office (CBO), within Medicaid and Medicare Part D, average net prescription prices have fallen due to the increasing availability of generics. Prices for brand-name drugs, and newer drugs in particular (which tend to be specialty in nature), have increased, but the increases have been offset by greater availability of lower-priced generics on average. While the report examines average prices in Medicare Part D and Medicaid, the CBO says, “National data on average prescription drug prices is not readily available, but the average net price of a prescription has increased considerably in recent years”.
High prices for new specialty drugs have led some policymakers to worry about the profitability of pharmaceutical companies. The CBO explains that a longer-term view indicates that “the profitability of the pharmaceutical industry is similar to that of other industries”. The report examines the factors at play:
To understand the profitability of the pharmaceutical industry, one must distinguish the short-term revenues and costs of producing a drug once it is approved from the much larger long-term costs of drug development and marketing. obtaining the sales authorization. … A pair of recent studies found that when capital costs and financial risks are taken into account, the profits of the pharmaceutical industry are close to or just below the middle of the distribution of all industries and could have a downward trend.
If the government were to intervene in the market by fixing prices, it would mean trade-offs for American consumers.
Currently, the pharmaceutical industry is one of the most intensive in R&D, devote around a quarter of its turnover to R&D in 2019, superior even to semiconductor or software companies. Additionally, the drug development process is highly risky and uncertain, with only about 12% of drugs entering clinical trials and receiving final approval from the Food & Drug Administration. Many of the new drugs approved are specialty drugs. As CBO explains, “Specialty drugs typically treat chronic, complex, or rare conditions, and they may also require special handling or monitoring of patients. Many specialty drugs are biologics…which are expensive to develop, difficult to imitate, and often priced high. The availability and use of new specialty drugs has resulted in numerous health benefits, better outcomes and extended life for consumers.
Drug pricing legislation would lead to lower prices for some existing drugs, which would likely lead to reduced R&D investment as expected returns from developing new drugs would decline. While lower prices would lead to increased use of existing drugs, less R&D would lead to fewer new drugs. In a CBO analysis of a previous version of drug pricing legislation, the report explained, “The overall effect on the health of families in the United States that would result from increased use of prescription drugs but reduced availability of new drugs is unclear.”
The experience of European countries with drug pricing illustrates how the past imposition of government pricing policy has scared off R&D. Until the 1990s, biopharmaceutical R&D in Europe was consistently higher than in the United States. Research by Nam D. Pham and Mary Donovan of ndp analytics explains how the divergent political approaches of Europe and the United States in the 1990s turned the tide—American biopharmaceutical R&D has overtaken Europe and the United States has seen a significant expansion of employment in the sector. Over the past two decades, the United States has been the leader in funding biomedical R&D, accounting for approximately 70-80% of global funding.
Golec and Vernon valued that in 2004, the real costs of the European Union’s drug pricing policies amounted to “around $5 billion in R&D expenditure, 1,680 fewer research jobs and 46 new drugs discontinued. The long-term prospective costs for the EU are estimated at between 10 and 20 times these costs. … These policies essentially trade health and job opportunities for future generations for cost savings for today’s pharmaceutical consumers.
From a consumer perspective, drug pricing policies can also lead to delays in access to new drugs coming to market, which can have negative health effects by slowing the adoption of new technologies.
Another concern with the United States’ consideration of government-set drug prices is where R&D activity might go in response. A 2020 report notes: “The United States was once a world leader in biomedical innovation, but it has become the world leader through the adoption of a wide range of public policies. The report further explains how a number of competitors have implemented strategies to attract innovation in the life sciences, including China, Singapore, Japan and Sweden.
Government price fixing is a misconception. Adopting government-fixed drug prices is no solution to today’s high inflation and would discourage R&D and innovation that benefits American consumers.