How to Reduce Prescription Drug Prices: First, Do No Harm

Top-down controls restrict access. Instead, encourage patients to shop around among pharmacies.

Everyone wants to reduce prescription drug prices, but how? First, do no harm. It’s true that Americans pay more for medication than just about anyone else: A 2018 report from the White House’s Council of Economic Advisers found that, as of 2009, the price per dose of patented drugs was five times as high in the U.S. as in foreign markets.

Yet Americans get something in return—early access to lifesaving medications. Between 1995 and 2005, 12 new cancer drugs were first introduced in the U.S., versus 13 in Canada, France, Germany, Japan, Switzerland, and the U.K. combined. Of the 45 novel drugs the Food and Drug Administration approved in 2015, 29 were available in the U.S. first. And a 2017 study found that all 45 approved new cancer drugs were covered by Medicare in the U.S., compared with public insurance coverage of only 26 in the U.K., 19 in France, 13 in Canada, and 11 in Australia. America has superior treatment results for virtually all serious diseases reliant on drug treatment, including cancer, heart disease, stroke, high blood pressure and diabetes.

Price controls would jeopardize that advantage. A 2014 study of 642 drug launches in 76 countries found that price regulation “strongly delays” them. A 2005 study estimated that drug price controls would have led to 198 fewer new drugs in the U.S. market from 1981 to 2000, at a societal cost of about $20 trillion, or more than 28 times the estimated savings from those price controls.

Pegging drug prices to those of foreign countries, as both Bernie Sanders and Donald Trump have proposed, would ultimately lead to the same consequences Europeans endure—reduced access to critical drugs and worse outcomes, including more deaths from disease.

Price negotiation by Medicare sounds logical. Economists have noted, however, that a single dominant buyer would lead to supply shortages and fewer new products. But there’s a more serious problem. Only the patient, not the negotiator, will suffer the severe penalties of sickness and death when drug availability and pharmaceutical innovation dry up.

“Government negotiation” would generate restrictions based on political budgets rather than clinical benefit. The U.K.’s National Health Service launched its 2017 Budget Impact Test to delay introducing any new drug up to three years, if projected spending exceeded £20 million during any of the first three years, regardless of cost-effectiveness. NHS patients would be forced to wait years for the “acceptable price” to kick in. By this formula, the more widely a drug is needed, the more likely it is to be delayed. The Alzheimer’s Society calculated that a drug costing as little as £23.50 a year per patient (less than 9 U.S. cents a day) would be subject to the new restriction.

So how can policy makers bring drug prices down? By empowering consumers, not insurers or other intermediaries.

The Trump administration has announced a proposal to do away with rebates paid by drug manufacturers to pharmacy-benefit managers, replacing them with discounts to beneficiaries at the point of sale. PBMs are middlemen that control “formularies,” the lists of drugs covered by a plan. Rebates from drug companies to PBMs are payments for influence—either to position a drug on the formulary as “exclusive” or to give it preferred status over competitors.

PBMs act counter to patient interests while aggravating the lack of price transparency. These complex behind-the-scenes payments—$179 billion in 2016—reward inflated list prices, on which patient premiums are often based. This prevents patients from taking account of price. Some PBMs even use contractual gag clauses to prohibit pharmacists from volunteering that a medication may be less expensive if purchased for cash—as it was in more than 20% of cases, according to a 2018 study.

The Trump measure is necessary but not sufficient. Patients have neither the power nor incentive to shop around and put downward pressure on drug prices, even though prices vary greatly for the same drug. In a Consumer Reports study, the national average price ranged by a factor of 20 for a one-month supply of a given generic. In a single city, the cost of a 30-day supply varied by a factor of 10 to 17, depending on the drug. For the 15 million seniors taking five or more medications daily, the monthly savings from comparison shopping could amount to many hundreds of dollars. Yet insurance tends to minimize the patient payment. I use two prescription drugs, for which my pharmacy charges $12.49 and $31.49 for a month’s supply. My copayments are 95 cents and zero, respectively. Why would I care if the “retail prices” are lower elsewhere?

Go-betweens like PBMs should be eliminated. And rather than broaden coverage, it would be better to require patients to pay directly for more of their drugs and reward them for saving money. Cheaper, higher-deductible drug insurance, coupled with larger, liberalized-use health savings accounts, would accomplish both goals—especially for seniors, who make up about 12% of the population but account for over 34% of prescription-drug use. HSAs are currently prohibited for seniors.

Government also should tear down barriers to the supply of new and competing drugs. Bureaucratic excesses must be streamlined, including overlong clinical trials that require more than 14 years and $2.5 billion on average, a cost that has multiplied 10-fold in the past decade. The FDA has already made progress: 2017 saw 68 new drugs and biologics approved and a 60% increase in generic approvals over the previous year.

Drugs are the most significant reason for the past half-century’s unprecedented gains against deadly and debilitating disease. But policies that aim to reduce drug prices—price regulation and weaker patent protection—are also associated with delayed availability, less innovation, and limited access. Legislators must avoid replicating misguided policies that have harmed patients elsewhere, and instead rely on competition for empowered patients, the ones with the most to lose.