Drive a stake through the heart of Democrats’ Medicare-drug-price monster

Like a tenacious zombie in a science-fiction film, Medicare drug-price negotiation is back. One such proposal in President Joe Biden’s $1.9 trillion Build Back Better bill died in December, but Democratic senators eager to boost their chances in the midterms have resurrected it in a new bill.

Medicare Part D is a prescription-drug program that about 50 million Medicare beneficiaries (three-quarters of all enrollees) have voluntarily signed up for. Private-plan sponsors compete for enrollees based on benefits and price, such as premiums and cost-sharing. Sponsors negotiate drug-price discounts directly with manufacturers. The government is statutorily forbidden from interfering in the process.

The proposed legislation would allow Medicare to “negotiate” prices for a limited number of Part D prescription drugs, impose price controls limiting Medicare-drug-price increases to inflation and limit Medicare beneficiaries’ annual out-of-pocket drug costs to $2,000.

Of course, everyone knows that Medicare, which accounts for a huge percentage of drug purchases in this country, won’t so much negotiate prices as dictate them.

Democratic legislators are trying to appeal to the 83% of adults who tell pollsters that the cost of prescription drugs is unreasonable. Yet that same poll shows that only 26% report difficulty affording their drugs. The number is even lower (20%) in the Medicare age population, 65 and older, which includes many who aren’t enrolled in Part D. More than 80% of Part D enrollees are satisfied with the program.

No doubt Democrats are anxious to distract voters from inflation that has reached levels not seen in 40 years. The Consumer Price Index for all items was up 1% in May and 8.6% year over year.

Yet drug-price inflation is a different story. While Democratic senators focus on increases in drugs’ list prices, the actual prices consumers pay, after various discounts and rebates, are considerably lower. The CPI for prescription drugs (CPI-Rx, which measures price changes, accounting for discounts and most rebates, in a representative basket of drugs over time) declined 0.1% in May and was up just 1.9% over the past year.

Indeed, US drug-spending growth has been relatively stable in the last 15 years and has been lower than the growth in health-care spending.

Prices of brand-name prescription drugs are higher in the United States than elsewhere, especially for a few new, expensive specialty drugs. But aggressive price competition has led Americans to switch from branded drugs to generics for most of their medicines. Americans use more generics (9 out of 10 prescriptions) and pay less for them (16% lower on average) than patients in other developed countries. 

Since 2017, the Food and Drug Administration has been OK’ing more drugs faster and with a greater focus on generics, as part of former Commissioner Scott Gottlieb’s Drug Competition Action Plan. That has spurred greater competition and moderated price increases. New brand-name drugs entering the market compete with other drugs that treat the same condition. And when generic versions are approved after patent protections end, prices fall rapidly as patients switch.

The price controls in the Senate bill aren’t merely unnecessary. They will decrease the number of innovative, health-improving new drugs that ultimately become the low-priced generics most Americans use. Pharmaceutical companies won’t invest in research and development knowing that future profits will be limited by government bureaucrats.

University of Chicago economist Tomas Philipson estimated that the price controls in the Build Back Better bill would cause a 29% to 60% reduction in research and development, resulting in 167 to 342 fewer new drug approvals over the next 20 years. There is little reason to think this nearly identical Senate proposal will do much better.

Medicare drug-price controls were a bad idea in December and remain a bad idea today. If we want to preserve the innovative pharmaceutical industry that gave us COVID vaccines and therapeutics in record time, we should put a stake through the heart (head?) of this renascent drug-price control monster.

Joel Zinberg, MD, is a senior fellow at the Competitive Enterprise Institute and director of public health and wellness at the Paragon Health Institute.