Democratic legislation aimed at prescription drugs could sacrifice future savings in healthcare to reduce costs in the short term.
House Democrats have proposed HR 3, a bill that would require the federal government to negotiate prices with drug manufacturers. The negotiated price of a drug could not exceed 120% of the average price of that drug in countries where costs are lower, including Australia, Canada, France, Germany, Japan, and the United Kingdom.
But that could reduce future drug innovation. The Congressional Budget Office estimated in 2019 that HR 3 would save Medicare almost $450 billion over 10 years. Still, the pharmaceutical industry’s lost revenue would result in eight to 15 fewer drugs produced over the next 10 years. The California Life Sciences Association, an industry group, commissioned a study showing it might be as high as 61 fewer medications.
“The legislation is essentially a shortcut, trying to steal from the future in return for trimming some costs right now,” said Chris Pope, a senior fellow at the conservative Manhattan Institute. “It is shortsighted.”
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Spending on prescription drugs often yields savings elsewhere in the healthcare system. A 2009 study in Health Services Research of Medicare beneficiaries found that every extra prescription filled for a patient results in a $104 reduction in hospital costs.
In the 50 years from 1965 to 2015, age-adjusted mortality from heart diseases fell nearly 69%, from 543 per 100,000 to 169. Statins, beta-blockers, and other drugs developed during that time account for a substantial portion of that decline.
Pope noted even costly drugs often reduce costs. For example, Sovaldi, a drug that treats hepatitis C, costs $84,000 for a three-month course. The cost may seem astronomical, but hepatitis C causes liver damage that can necessitate a liver transplant. A liver transplant costs $577,000 on average and requires the patient to take anti-rejection drugs for the rest of his or her life.
Of course, not all drugs reduce healthcare costs.
“I think it depends on the drug,” said Frederick Isasi, executive director at the liberal Families USA, a national, nonpartisan consumer healthcare advocacy organization. “I think there are many examples of drugs that are driving up the cost of healthcare astronomically, and there are good examples where they are not.”
For example, Isasi pointed to insulin: a drug used for decades to treat diabetes. Insulin costs increased between 15% to 17% annually from 2012 to 2016, rates much higher than inflation.
Indeed, prices for many prescription drugs appear to be on the rise. Research from 46brooklyn Research, a nonprofit organization that focuses on prescription drug prices, found that pharmaceutical companies increased the price for 500 drugs for 2021.
But Pope countered those are just “list prices” for the drugs.
“They are like a sticker price for a car,” Pope said. “No insurance company pays them. The actual price, when you factor in drug manufacturer rebates and discounts, is lower — sometimes substantially lower.”
Isasi, though, claimed federal policy incentivizes pharmaceutical companies in recent years to focus on more expensive and hence more profitable drugs, thereby driving up drug costs.
“Industry is really hammering away on a very small group of drugs,” Isasi said. “Seventy-five percent of new drug approvals are for specialty drugs that cost at least $600 a month.”
Specialty drugs make up 2% of prescriptions and over 49% of drug spending in the United States, according to research from the IQVIA Institute for Human Data Science.
Pope said those drugs are only expensive as long as their patents last. After that, competitors come in with generic alternatives.
“What happens to every drug eventually when the patent ends is the price goes down from a very high amount to the marginal cost of manufacturing, which is usually a trivial cost,” Pope said. “That’s an enormous windfall for every drug user.”
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He noted that from 2014 to 2018, there was more than $51 billion in savings from drugs with expiring patents. That more than offset the $22 billion increase in drug spending from higher prices during that same time frame.
