Two years ago this month, President Trump promised the American people that he would stop drug companies from “getting away with murder” with their annual ritual of price increases. Since then, his historic actions on drug pricing have produced historic results. One official measure of drug price inflation was actually negative in 2018, for the first time in almost 50 years.
But many problems remain. This January, drug companies once again announced large price increases — by one analysis averaging around 6 percent per drug. This annual practice of large price hikes must stop, and prices must come down.
Drug companies defend themselves by pointing out that these annual increases are on the “list price” of drugs. List prices are typically reduced by additional payments to middlemen such as pharmacy benefit managers and health insurers. These payments, known in the industry as rebates, are now a standard practice in drug purchase contracts. Accounting for these payments, overall drug spending by insurers and patients does not rise as much as the list price increases might suggest, so drug companies claim that the annual list price hikes do not really matter.
But Americans know better, because increases in list prices hit their pocketbooks. Each January, many Americans see their insurance deductibles reset, and they have to start over again paying out of pocket — based on list prices — for the drugs they need. This can mean thousands of dollars in drug costs for the 47 percent of Americans in high-deductible health plans. Meanwhile, for especially expensive drugs in Medicare Part D, patients must pay coinsurance, which is calculated as a share of list price.
Drug companies make these annual price increases because the pharmaceutical market is almost the opposite of a real market. Pharmacy benefit managers, hired by insurers and employers, choose which drugs are covered, and a drug with a higher list price is often a more attractive choice to cover than a cheaper competitor.
Why? Higher prices allow drug companies to make bigger rebate payments, which go to pharmacy benefit managers, insurance companies, and employers, rather than to patients.
In a functioning free market, competition drives down prices. Most drugs, including branded drugs, have competitors. But in the broken drug market we have, prices keep rising to make more room for bigger rebate payments. Drug companies’ press releases about this year’s price increases laid out this dynamic explicitly, pointing that many price increases are entirely captured by rebates.
Fundamental changes to this system are necessary, and we have already seen some positive changes in behavior. From May 2018, when the president and I released the Health and Human Services blueprint for lowering drug prices, through the end of the year, drug companies took 57 percent fewer price increases on brand drugs than in the same period in 2017. Some companies, such as Amgen, Merck, and Gilead, cut the list prices on certain drugs. The analysis by Rx Savings Solutions that found the 6 percent average price increases in 2019 noted that was lower than the 9 percent average in 2018.
But the definition of success for Americans and for President Trump will be lower list prices — not flat net prices or smaller and fewer list price increases.
The Trump administration has taken significant action since the release of the drug-pricing blueprint. For instance, thriving generic drug competition can drive down drug costs for patients. The Food and Drug Administration approved a record number of generic drugs in fiscal year 2018, beating the record it had set the year before. According to the Council of Economic Advisers, generic approvals under the president have already saved consumers $26 billion. Meanwhile, the FDA also approved a record number of new drugs and biologics in 2018, often providing new competitors for existing drugs.
But in other areas the situation is much worse. The U.S. pays almost twice as much as our peer countries do for the most costly physician-administered drugs in Medicare, because there is no negotiation and often little competition. The president has proposed a model to fix this situation by securing for Americans a share of the discounts that companies voluntarily give other countries.
The administration has also proposed other incentives specifically to drive down list prices. The president proposed the first-ever requirement that drugs’ list prices be disclosed in television advertising. We are also working with Congress on legislation to undo the Affordable Care Act’s limits on the penalties manufacturers pay to the Medicaid program when they raise their list prices faster than inflation.
The president has helped empower patients as consumers by signing two pieces of legislation to ban pharmacy gag clauses, which prohibited pharmacists from telling patients about more affordable ways to pay for drugs. According to a University of Southern California study, patients are likely paying more in copays than they would need to pay in cash in almost a quarter of prescription transactions.
Any system in which so many Americans owe more for a copay than the actual cost of the drug is clearly not set up to serve them. Any market where price increases make a product more competitive is nobody’s idea of a functional market.
All options are on the table to fix this system, as long as they respect drug safety and keep patients at the center. President Trump is willing to work with Republicans and Democrats to achieve lower prices. He will continue taking action until we have a truly competitive market for prescription drugs — one in which prices will finally go down, not up.
Alex M. Azar II is the secretary of the U.S. Department of Health and Human Services.