In a rare but important display of congressional bipartisanship, Sens. Chuck Grassley (R-Iowa) and Ron Wyden (D-Ore.) have co-sponsored the Prescription Drug Pricing Reduction Act, which includes a meaningful solution to the crisis created by runaway drug price increases. The act would put a cap on drug price increases in Medicare Part D by requiring drug manufacturers to rebate 100% of any price increase that exceeds the rate of inflation.
An AARP study shows that the average annual cost of treatment with one of the 214 most widely used branded medications among older individuals with chronic conditions increased almost $5,000 in 11 years: from $1,800 in 2006 when Part D went into effect to nearly $6,800 in 2017. Had the Grassley/Wyden proposal been enacted in 2006, the average price of these medicines would have increased by just $500, and the drug price crisis would not exist.
A related AARP study that was limited to 97 specialty drugs shows that in 2017 the average annual treatment cost for one specialty medication was $79,000, almost $20,000 more than the average U.S. household income. The cost of that medicine would have been $30,000 if price increases had been limited to inflation.
During the same 12-year period, the average annual Social Security benefit, which is capped at the inflation rate, rose by just $3,500. Under Medicare Part D a senior citizen must incur $5,100 in out-of-pocket costs before becoming eligible for catastrophic coverage and pays an additional 5% of costs thereafter. Drug price increases have more than wiped out the increases in the Social Security benefit and are forcing many elderly individuals to choose between food and medicine because they can’t afford both. That not only diminishes their dignity and quality of life, but leads to more illness and even higher health care and drug costs.
Many experts reasonably argue that U.S. drug prices should be rolled back so they are no higher than the prices being paid in Canada or Europe, or that prescription drugs should be imported from those countries as a way to achieve price parity. The Grassley/Wyden plan would simply prevent further predatory price increases without attempting to correct the unfairness of past increases.
But even this modest proposal faces long odds against enactment. Thirteen of the 15 Republican members of the Senate Finance Committee voted to eliminate the price increase cap from the bill before it was favorably voted out of committee. They contend that the price cap is a price control that offends free market principles and will undermine investment in the discovery of new medicines. Despite support within the Trump administration for the price cap, it has no chance of achieving the 60 votes needed to pass the Senate unless some of these Republican senators yield to public pressure and there are no defections by Senate Democrats.
Limiting price increases to inflation is not a form of price control. It is, instead, a basic method for containing costs that is routinely used in the government’s procurement of military and civilian equipment and in private sector procurement contracts. In fact, the Grassley/Wyden proposal merely seeks to impose the same inflation price cap for Medicare that Congress has already enacted for Medicaid and Veterans Health Administration drug purchases.
That limitation was not included in Medicare Part D because of the ill-conceived decision by Congress to allow private insurers and pharmacy benefit managers to negotiate Part D drug prices. Those negotiators have profited from large price increases and opaque rebate arrangements and bear responsibility for helping to create the drug price crisis.
Nothing in the Prescription Drug Pricing Reduction Act limits the ability of a pharmaceutical manufacturer to set the initial price of a drug. Launch prices are high enough to cover research costs and earn a profit. Nor are price increases related to either a drug’s cost or to a significant increase in research spending. Rather, $200 billion in price increases between 2006 and 2017 simply offsets the loss of a comparable amount of revenue due to generic competition as the monopolies on older medicines expired. In short, price increases are being used to maintain high levels of profit.
If opponents of the Grassley/Wyden bill were serious about protecting free market capitalism, they would repeal the extra patent protections and market exclusivities they granted to the pharmaceutical industry that delay the existence of a free market and make it possible for the industry to profit from price increases rather than from the discovery of new medicines. Limiting price increases to inflation simply corrects an abuse of the extra monopoly power that Congress gave to the pharmaceutical industry and forces the industry to produce more innovation if it wants to earn more profits.
The opposition to this price cap is rooted in politics not economic theory. The pharmaceutical industry spends far more than any other group on lobbying and campaign contributions designed to ensure that its profit needs prevail over the reasonable needs of ordinary citizens. Until elected officials give a higher priority to the survival of our elderly than to their own political survival, simple, bipartisan solutions like the Grassley/Wyden bill have no chance of becoming law.
Alfred Engelberg is a philanthropist and retired intellectual property lawyer who represented the generic drug industry for decades on prescription drug competition issues.