Price controls on drugs are not an effective way to make medication affordable for patients. The high burden of the cost of medication is a result of high out-of-pocket costs for patients with insurance.
Different policy ideas have been proposed to address the high cost of prescription drugs, including:
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Price controls: Letting the government just set prices for drugs would lower their prices but might not make them more affordable. After all, we’ve seen that insurance plans can charge patients more for a generic drug than the price they paid to the drug company (which is why Mark Cuban has made a big deal about how his pharmacy sells generic drugs for cash at lower prices than people get them from their insurance). Consider that if price controls cut the price of a $100k drug in half, someone with a $5k deductible that they can’t afford still would be stuck paying that same $5k deductible. And not only would price controls not necessarily make a medicine more affordable, it would discourage investment in the development of new medicines. And that wouldn’t save America any money because not inventing medicines, which can go generic, leaves us relying on hospitals for our care, and hospitals don’t go generic.
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International Reference Pricing (i.e., setting U.S. Prices to be the same as in other countries): This is a weaker attempt at price controls that is harmful to innovation. That’s because instead of drug companies pricing drugs in the U.S. At the lower prices they charge in other countries, drug companies would protect the main U.S. Market by setting foreign prices to be the same as those in the U.S. If other countries refused to pay those higher prices, then drug companies would lose out on profits and that might deter investors from funding development of the next generation of medicines. It’s also possible that once companies can claim that they are charging the same prices in the U.S. As elsewhere, they attempt to launch drugs at even higher prices in the U.S., thereby making up for lost international profits. If that were to happen, drug development might remain attractive for investors but only because the U.S. Pays even higher prices than before, going from incentivizing most of the world’s drug innovation to incentivizing ALL of it. Put another way, as unfair as it might be to have cheap roommates who pay less than their fair share for a mortgage, if requiring that they all pay the same as you causes them to just move out, then it’s better to just let them freeride and pitch in something else (maybe they’ll do your laundry!) than to move out and get stuck paying for the whole mortgage.
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Seizing intellectual property (IP) via March-In Rights or TRIPS Waivers: This is akin to price controls since it overrides a company’s ability to earn a market-based return from its invention and would discourage companies and their investors from investing in the development of new drugs.
We looked at alternative solutions that could be effective:
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Lowering OOP Costs: Insurance works best when we all pay our premiums and can actually afford appropriate treatments when we need them. When insurance charges people higher copays and deductibles than they can afford for treatments they need, then it hasn’t really insured them. A treatment’s affordability is therefore a function of proper insurance; to make medicines more affordable, we need to cap what insurance plans can charge patients out of pocket if they want to brand themselves as insurance plans. Insurance is not forced to cover all medicines, but when it claims to cover something, it should cover it properly, which means with low or no OOP costs.
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Guaranteed forward contracts: A forward contract represents an agreement to purchase a certain number of doses of a drug in the future, if it’s developed and approved, at a pre-negotiated price. This model was used to accelerate the development of COVID-19 vaccines and is used in the development of pandemic flu and other vaccines. To incentivize the development of novel antibiotics, Congress is discussing passing the PASTEUR Act, which would offer from $750M-$3B over a decade out of a total of $6B prize pool to companies that get specific kinds of novel antibiotics approved. It’s like a subscription agreement that provides guaranteed revenues regardless of how few doses of that novel antibiotic hospitals actually need.
Lastly we discussed the tremendous value that society gets from novel medicines, as calculated by GCEA (Generalized Cost Effectiveness Analysis), a type of math that takes into account many factors that traditional Cost Effectiveness Analysis (CEA) ignores about medicines (e.g., they go generic, benefit not only patients but also caregivers, and restore a patient’s and caregiver’s productivity). GCEA even illustrates that the prices negotiated by the U.S. Market represent a bargain compared to the much higher societal value of medicines (largely because insurance plans make drug companies compete on price). Taken together, it becomes clear that the mere 8% of the total healthcare dollar that goes towards paying for novel branded medicines incentivizes the continued generation of considerable societal value from the development of yet better medicines.
