Want cheaper prescriptions? Start bargaining
President Joe Biden and Senator Bernie Sanders wrote in a recent op-ed that there’s “no rational reason” why Americans pay the highest prices in the world for prescription drugs — almost three times more than their peers overseas, according to a recent analysis.
One rational reason is that, until recently, the U.S. was the only developed country that didn’t negotiate prices with the pharmaceutical industry. Lawmakers eager to lower Americans’ health-care costs should stay focused on getting those negotiations right.
In most rich countries, one buyer — the government — bargains with manufacturers for bulk purchases of medications. In the U.S., that task falls to the private sector, largely through pharmacy benefit managers.
PBMs bundle the buying power of employers and other providers of health benefits and negotiate on their behalf. The industry, which oversees prescriptions for 80% of the U.S. market, says it saves beneficiaries hundreds of billions of dollars a year.
Yet a growing body of evidence suggests that PBMs haven’t been doing their job — at least, not consistently — and in some cases may be driving prices higher. For all their heft, PBMs still aren’t as effective as national governments at delivering discounts.
According to recent reports, the Federal Trade Commission is preparing to sue the three largest PBMs for inflating prices, and several states have already done so.
Troubled by recent trends, lawmakers have been scrutinizing the industry. Their investigations — some of which are still underway — have uncovered business practices that could lead to higher prices, as well as a supply chain governed by opaque contracts and potential conflicts of interest.
Legislation to address these problems — by increasing price transparency, among other things — has advanced through several congressional committees. Yet absent more evidence, it’s hard to see how these proposals will significantly lower drug prices.
Fortunately, there’s a better approach. In 2022, Congress passed the Inflation Reduction Act, which authorized Medicare to bargain with pharmaceutical manufacturers for the first time. The provision, starting with 10 medications and expanding gradually, is expected to save $100 billion over five years. Biden has proposed expanding the number of medications to 50.
Broadening negotiations is a good idea, so long as lawmakers recognize — and try to mitigate — the inevitable trade-offs. Drugmakers have voiced legitimate concerns that a single buyer will depress prices, discourage investment and stifle innovation.
Private forecasts about the impact of the IRA on drug development have been much higher than government estimates — and any one of those drugs could have improved the lives of millions of patients.
To their credit, drafters of the IRA included provisions that aimed to preserve incentives to innovate, largely by exempting most drugmakers from negotiations. If the government’s list expands, lawmakers will need to give thought to improving such protections. Under the IRA, for example, drugmakers aren’t rewarded for the time-consuming and costly studies that would determine if an approved medication can treat new ailments. Some period of extended exclusivity in such cases would make sense.
The law also subjects drugs with the same active ingredient — say, a liquid dose and a tablet — to negotiations even if they treat different conditions and have been filed under separate applications with regulators. These drugs should be negotiated on their own merits. Bringing the exemption period for small-molecule drugs (currently nine years) in line with biologics (at 13) would be another reasonable compromise. The European Parliament, worried about a lack of innovation and limited access to new drugs, has taken a similar approach.
For too long, the fragmented U.S. health-care system has inflated drug prices. A single government negotiator is a promising remedy. With the right incentives, lifesaving medications at reasonable prices should be an achievable goal.
