Drug spending in the United States is at an all-time high and still rising. Studies have repeatedly shown that the U.S. pays far more for the same prescription drugs than other high- and middle-income countries. Patients in the U.S. are more likely to report that they can’t afford their medications; half of all of adults with lower incomes go without care because of cost.
This trajectory has kept prescription-drug-pricing reform on the top of to-do lists for policymakers on both sides of the aisle at the federal and state level for years. President Biden talked about the issue in his first address to Congress. Bills have been introduced recently to reduce drug prices and increase affordability for patients and their families. And Congress has held numerous hearings over the past month.
The sustained attention is not a surprise. The American public has long supported drug-pricing reforms, regardless of political affiliation. The employer community also has embraced government intervention to curb drug prices.
There is a wide range of policy options currently under consideration in Congress. Some proposals focus specifically on what patients pay at the pharmacy counter. Reducing those copayments is not enough. We also have to address the underlying pharmaceutical prices that have driven up copays and premiums for patients and led to unsustainable growth in government and employer spending.
One way to do this is by allowing the federal government to negotiate drug prices. The U.S. government has a long history of overseeing delivery and setting prices for health care services in the Medicare program. The government’s role in Medicare has kept its prices lower than those paid by private insurers and has not stifled innovation or participation in the program. There is also evidence that the government can be an effective price negotiator; for example, the Veterans Administration and Department of Defense have negotiated prices for certain drugs. Recently the government successfully negotiated the price of the COVID-19 vaccine. Manufacturers accepted the prices the government set and people in the U.S. were guaranteed affordable access to innovative products.
The savings that could be realized from drug-pricing reforms are substantial. For example, an existing proposal that includes the ability for the federal government to negotiate prices for certain drugs could save the federal government almost $500 billion over 10 years, according to the Congressional Budget Office. Even more modest proposals could save the government close to $100 billion, although admittedly with less in the way of relief to both patients and payers.
While debates will continue on how far the federal government can and should go to reform the prescription drug market, it is an overreaction to say that any efforts to address drug pricing will stifle innovation. The pharmaceutical industry, which relies on Medicare and Medicaid for much of its revenue and the federal government for funding of research and development, has the largest profit margins of any sector among publicly traded companies, including other innovative sectors such as technology. Even with lower prices, the pharmaceutical industry’s profits would ensure that the sector remains attractive enough for future investment. In addition, the government subsidizes drug development through its funding of research and development and will continue to stimulate innovation this way, especially if savings from drug-pricing reform are reinvested in the National Institutes of Health research budgets to compensate for reductions in private investment. The government also could pursue other options to promote innovation, including lowering drug-development costs and reducing sales uncertainty (e.g., by guaranteeing contracts).
Some fear that reduced prices will result in a lack of access to medications if manufacturers decide to pull their products from the market, but this fear appears overblown. Even in the most aggressive of policies under consideration, prices in the U.S. would still be among the highest in the world, though more in line with other countries. It seems unrealistic that pharmaceutical companies would pull their drugs from one of the largest, highest-paying, and most profitable markets in the world.
Reforming how we pay for drugs in the United States will save federal dollars, make drugs more affordable for patients, and provide an opportunity to redirect federal savings to address critical gaps in coverage, access, and affordability.