Opinion: Drugmakers Aren’t Driving Inflation

By Dana Goldman and Erin Trish

This article was originally published in The Wall Street Journal on July 7.

As inflation has worsened, the Biden administration and its allies have focused attention on an old bogeyman: prescription drug prices. Democratic Sen. Joe Manchin of West Virginia recently told an AARP gathering that “If we do nothing more this year, that’s the one thing that must be done.” On NBC’s “Meet the Press,” former Treasury Secretary Lawrence Summers singled out government negotiation of drug prices as one of the “most important” policies to control inflation.

It’s time for a reality check. The consumer-price index rose 8.6% in May compared with a year earlier. Household spending on prescription drugs rose only 1.9% over the same period. In the last quarter of 2021, net prices for medicines—after subtracting rebates, discounts and fees—dropped 0.7%, the largest quarterly decline in 15 years. If other products such as eggs (up 32%), gasoline (up 49%) and used cars (up 16%) had behaved like drugs, inflation would be completely under control.

Drug prices are an attractive political target, but the campaign to control them relies on a misunderstanding of how they work.

Large pharmaceutical benefits managers, or PBMs, negotiate prices with drug companies on behalf of insurers and employers. In exchange for placing drug companies’ products on insurance formularies, PBMs secure billions of dollars in rebates to pass on to patients. The problem is, they often keep those rebates to themselves. The net effect is that consumers pay more than they should.

Insulin is a prime example. PBMs have pocketed outsize rebates while makers of insulin products have seen their net prices decrease. Meanwhile, higher copays are becoming prohibitively expensive for some patients. In March the House approved a $35-a-month cap on insulin copays for patients on Medicare or in private insurance plan, and the Senate is now considering a matching bill.

Capping out-of-pocket costs makes sense. That is, after all, what insurance is designed to do. But capping list prices—as some in Congress have proposed—makes no sense, and wouldn’t effectively tamp down inflation. Instead, such a restriction would perversely encourage manufacturers to launch new drugs at higher prices (since they can’t raise them in the future) and discourage innovation.

What, then, should Congress do? First, it should seek to make drug markets as efficient and competitive as possible. It’s under those conditions that unit costs will be most affordable. One way to ensure that is by continuing to support the stepped-up Food and Drug Administration drug-approval process, which has accelerated in recent years. As new brand-name drugs are allowed to compete with rival drugs—and new generic versions of existing drugs enter the market—prices will inevitably fall.

Second, policy makers should advocate adopting global measurements of value, rather than only cost. Take the drug that eliminated hepatitis C virus. At first, governments and private insurance payers resisted adopting it, because of its relatively high unit cost. In the short run we preserved budgets and kept prescription-drug inflation lower. But in the long run, we lost thousands of lives and added hundreds of billions of dollars to healthcare costs. Making a drug’s value the priority in real-world settings—notwithstanding its initially high costs—will aid innovation for other treatments, such as cancer and Alzheimer’s, and improve the return on the dollars we do spend.

The Covid vaccination process was instructive. To make sure everyone had access, the federal government bought the vaccines en masse. The FDA sped its approvals. And the result was widespread uptake and dramatically reduced mortality rates. The effect of reimbursing care on the basis of value rather than price and preserving access to that care was especially favorable.

The right combination of pharmaceutical policies will create incentives for innovation and allow market-based competition to defuse price inflation. Advocating price controls—and misreading inflation numbers for political gain—will only take us in the wrong direction.

Mr. Goldman is dean of the Price School of Public Policy and a co-director of the Schaeffer Center for Health Policy and Economics at the University of Southern California. Ms. Trish is a co-director of the Schaeffer Center.