Financial risk assessment
gettyThe Trump Administration has announced its desire to impose price controls on drugs – officially called a most favored nation (MFN) policy. Essentially, the policy sets the price for the targeted drugs at the lowest price in other industrialized countries. The president’s justification for the MFN is simple: Americans are getting ripped off because drug prices are cheaper in other industrialized countries.
This justification misreads the problems plaguing the U.S. healthcare system. Three flaws drive up list prices for innovative medicines relative to other industrialized countries (OECD, or Organization for Economic Cooperation and Development). First, the U.S. drug market is plagued with inefficiencies. Second, other industrialized countries impose uneconomical price controls on innovative drugs. Third, the higher U.S. drug prices simply reflect the disfunction of the broader U.S. healthcare system.
Sustainably improving drug affordability in the U.S. requires policies that address each one of these flaws.
Before discussing the flaws of the current drug pricing system, it is important to recognize some of its strengths. For instance, 90% of all medicines prescribed in the U.S. are not branded drugs. They are generics and biosimilars. The vast majority of generic medicines in the U.S. cost $20 or less; average copays for patients are $6.06. These prices are also 33 percent cheaper in the U.S. compared to OECD countries. In other words, Americans spend less money than Europeans, Brits, and Canadians on 90% of the prescribed medicines.
Generics are less expensive because of the competitive U.S. marketplace. Imposing price controls, such as those the President is promoting, undermines the vibrancy of the competitive market, which risks the savings that patients are already receiving.
Despite the lower prices for generics, the claim that drug prices are more expensive than other industrialized countries is correct for the 10% of prescriptions that are innovative medicines.
Developing innovative drugs that help patients living with untreated diseases is costly – it costs up to $2.9 billion per therapy including post-marketing expenditures. Without an opportunity to recoup these capital costs, future innovations will stagnate to the detriment of patients.
Adopting the MFN policy eliminates the opportunity to recoup the capital costs and essentially quits on patients living with diseases without efficacious medicines. It also creates significant access issues for patients living with diseases where treatments are available – a common problem in other OECD countries.
Rather than accept the price controls’ high burden, the U.S. should focus on improving the efficiency of the drug pricing market. Focusing on these policy-created inefficiencies can generate significant savings for patients while still promoting the important goals of increasing access and promoting innovation. Addressing the flaws exploited by pharmacy benefit managers (PBMs) exemplifies these beneficial reforms.
PBMs are intermediaries that manage the prescription drug benefits for insurers and government payers. However, due to the opacity and complexity of the drug pricing system, manufacturers paid “PBMs and PBM contracting entities” $72 billion in 2022 alone, or $0.42 of every $1 spent on brand medicines in the commercial market that year according to a study by Nephron Research.
The PBMs excessive revenues meaningfully inflate total U.S. drug spending. Even more astonishing, for drugs like Ozempic or Enbrel, PBM’s 42% take exceeds the total price for the drugs in most OECD countries. Including the $58 billion in fees paid to PBMs for Medicare Part D prescriptions, PBMs’ total revenues exceed the total spending on drugs in Canada, the U.K. and Japan.
PBMs undue revenues inflate the overall cost of innovative drugs in the U.S., which leads to higher out-of-pocket costs for patients. Reforms, such as S.526, which focus on reining in PBMs inflationary impact and demanding greater price transparency will help address this problem.
It is not just the dysfunction of the U.S. drug pricing market that causes the price gap with the OECD. These nations also impose uneconomical price controls on innovative drugs. These price controls create serious access issues in the nations that adopt them. They also put upward pressure on prices in the U.S. because the capital costs for developing innovative treatments still exists. Consequently, the U.S. should push other countries to repeal (or at least moderate) their damaging price controls via trade negotiations.
The narrow focus on drug price comparisons with other industrialized countries is also problematic because it obscures the systemic cost problems that plague the entire U.S. healthcare system. Innovative drugs do cost more in the U.S., but so do hospital stays, out-patient surgeries, and medical visits.
In fact, the differences in spending on drugs in the U.S. is comparable to the differences in overall healthcare spending. Take the per capita expenditure differences. Per capita healthcare spending in the U.S. is 2.5 times larger than spending in the average OECD nation. Per capita pharmaceutical spending in the U.S. is 2.3 times larger than the spending levels in the average OECD nation. This similarity argues that the drug spending premium in the U.S. simply reflects the overall differences in total healthcare spending. Reducing the costs of drugs will, consequently, require improvements to the broader healthcare system.
Beneficial reforms to the U.S. drug pricing system are needed. However, importing foreign price controls via President Trump’s MFN scheme is not the answer. They risk patients access to current drugs, increase the risks that efficacious medicines will never be developed, and are incapable of solving the larger issues afflicting the U.S. healthcare system.
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