At his State of the Union Address on Tuesday night, President Biden reiterated his plan to lower prescription drug prices. He called on Congress to pass legislation to reduce medication costs in hopes the policy can jumpstart his broader Build Back Better agenda that's stalled in the Senate.
Reducing pharmaceutical costs is a popular and bipartisan issue. However, Biden's proposed solution to put the government in charge of setting drug prices would do more harm than good. A better approach to lowering medication bills is streamlining the convoluted drug supply chain characterized by kickbacks that drive up costs for patients.
Price-fixing threatens the prescription drug innovation pipeline because it artificially slashes research and development budgets for drugmakers. Pharmaceutical manufacturers currently plow around 25 percent of their revenues back into developing the next lifesaving treatment or therapy. Price setting reduces these research dollars and the breakthrough medications that otherwise would have been developed as a result.
A 2020 JAMA study finds it costs $1.3 billion to bring an average drug to market. Yet drug makers don't set their drug prices only to cover these costs. They must also generate revenue to account for all the potential medications that are unsuccessful. Approximately nine out of ten proposed drugs don't make it to the market. Drugmakers lose billions of dollars on these failed attempts. Rare successes have to subsidize failures in order for the medication pipeline to continue.
According to the nonpartisan Congressional Budget Office, Biden's price-setting scheme would result in ten fewer cures for patients in the short term and even more in the longer term. Other analyses, including one by University of Chicago economists, suggest Biden's proposal would sacrifice far more future treatments.
Recent pharmaceutical breakthroughs demonstrate how Biden's price-fixing plan is penny-wise yet pound-foolish. Covid-19 vaccines, which have prevented millions of hospitalizations and deaths, are a result of decades of expensive yet unprofitable research. Recent breakthroughs in cystic fibrosis treatments are transforming this very serious disease into a manageable condition that allow those afflicted to lead a relatively normal life.
Patients with rare and chronic diseases depend on this pipeline to save their lives and livelihoods. These are patients like 15-year-old Autumn Fuernisen, who is dying from a rare degenerative brain disorder known as Huntington's disease. There are currently nearly 800 rare disease treatments in development, including a promising one for Huntington's, that are threatened by government price setting.
There's a far better approach to reducing prescription drug costs: Implement a federal rule finalized by the Department of Health and Human Services in 2020 that streamlines the drug supply chain and directs the savings to patients at the pharmacy counter. Although this specific rule only targets medicine accessed through Medicare Part D, it will have a trickle-down effect on the broader market.
According to a Senate Finance Committee report, pharmacy benefit managers (PBMs), which are affiliated with health insurers and control the drug supply chain, are a primary reason for the rising list prices of medications. PBMs demand drug makers pay enormous rebates -- nearly 50 percent of a drug's cost -- to secure a spot on insurers' formularies (the lists of drugs they cover). These rebates get added to the overall cost of a drug, dramatically raising the price tag for patients.
This pay-to-play prescription drug market is entirely responsible for cost increases experienced by Americans. In fact, according to data from the independent organization SSR Health, the net price of prescription drugs, not including rebates, has actually fallen during the past few years. Yet due to skyrocketing rebate demands, list prices have increased and patients have suffered.
PBMs have long been exempt from anti-kickback consumer protections, allowing them to cartelize and profiteer off the drug supply chain. The HHS rule, which was delayed until 2026 after fierce PBM lobbying, would eliminate the kickback carve out for middlemen. Absent rebates, medication prices can fall by nearly 50 percent.
Rebate reform can achieve the drug price savings that patients demand while protecting the innovation pipeline they depend on. Biden should back this cost-free effort to lower drug prices.
Tom Price, M.D. is a former secretary of Health and Human Services and a former member of Congress. He serves as a senior health care policy fellow at the Job Creators Network.