Negotiating the Price of Drugs

In August 2022, President Biden signed the Inflation Reduction Act, which gave Medicare the authority to negotiate drug prices for the first time in history. Politicians are taking a victory lap. The truth is the pharmaceutical industry could take a victory lap. In this article, I will take a look under the covers.

Medicare spent $216 billion on prescription drugs in 2021 for over 60 million Americans. In addition to this, according to a report by the Pharmaceutical Research and Manufacturers of America (PhRMA), the pharmaceutical industry paid $110 billion in rebates and fees to pharmacy benefit managers (PBMs). This represents a 42% increase in PBM payments since 2016. I will write a future blog post about PBMs and how they contribute to the sky-high cost of drugs.

Medicare purchased more than 3,500 prescription drug products in 2022. I saw one report which said it was 4,500 drugs. The victory which the President and Congress brag about allows the Centers for Medicare & Medicaid Services (CMS) to begin negotiations on 10 drugs covered under Medicare Part D for initial price applicability in 2026. The ten drugs are:

* Advilor
* Eliquis
* Entresto
* Humira
* Imbruvica
* Insulin glargine (Lantus)
* Insulin degludec (Tresiba)
* Opdivo
* Revlimid
* Xarelto

The top 10 drugs accounted for $48 billion in Medicare Part D spending in 2021, or more than one-fifth of Part D spending that year. The number is significant, but why not let Medicare negotiate the price of all drugs it purchases? Why do any negotiated prices not go into effect until 2026? The answer is simple: the lobbyists won. They have also dragged out future negotiations. In subsequent years, CMS will select up to 15 more drugs covered under Part D for negotiation for 2027, up to 15 more drugs for 2028, and up to 20 more drugs for each year after that. To put a magnifying glass on this paltry approach, consider the automotive industry. The average vehicle has around 30,000 individual parts (this will be drastically reduced with EVs). Automotive manufacturers outsource an average of 80% of their parts, meaning around 24,000 parts per vehicle are purchased from outside suppliers. It goes without saying the automotive industry negotiates the price it pays for every part it buys.

In 2022, the pharmaceutical industry spent $372 million on lobbying Congress and federal agencies, outspending every other industry and making up more than half of all health sector lobbying efforts, according to OpenSecrets, a nonpartisan research group which tracks money in politics. The pharmaceutical industry also donates heavily to political campaigns. In the 2022 election cycle, the pharmaceutical industry donated $14 million directly to candidates for federal office, according to OpenSecrets. I consider this legalized bribery. Some politicians are worried about corruption in Ukraine. They should look in the mirror.

The industry claims if prices are negotiated it will impede their quest for new drugs. Baloney. If they need some extra cash, they should stop direct-to-consumer (DTC) television advertising. In 2021, the pharmaceutical industry spent $6.88 billion on DTC television advertising in the United States. Some people argue the TV advertising is a valuable source of information for consumers. More baloney. DTC television advertising is often misleading and exaggerated, and it can encourage people to take medications that are not right for them or which they do not need. We all know how to use search on the Internet. We don’t need the carpet-bombing of TV ads where actors are selected carefully to look like viewers who may have the disease the advertising is about. Also, do we want our children to grow up thinking the only way to be happy like the actors is take drugs? Other than New Zealand, no other country in the world allows DTC TV advertising. Why does the United States allow it? The pharma lobby.

Despite the criticisms I have described about the pharmaceutical industry, I am not blaming only them. I am blaming Congress. The pharmaceutical industry has played a major role in increasing life expectancy. Advances in medicine have helped to prevent, treat, and cure a wide range of diseases including cancer, heart disease, and infectious diseases.

According to the World Health Organization, global life expectancy has increased from 52.6 years in 1960 to 73.6 years in 2019. The current life expectancy in the United States is 76.4 years. The increases are due to a number of factors, including improved sanitation, nutrition, and healthcare. However, the pharmaceutical industry has played a particularly important role in recent decades.

There are many examples of how the pharmaceutical industry drugs have changed our life expectancy. Antiretroviral drugs have helped to turn HIV/AIDS from a deadly disease into a chronic condition that can be managed with medication. Antibiotics have helped to reduce the number of deaths from infectious diseases, such as pneumonia and tuberculosis. Statins have helped to lower cholesterol levels and reduce the risk of heart disease and stroke. Cancer drugs have helped to improve survival rates for many types of cancer. mRNA vaccines have saved millions of lives worldwide. One study estimated that mRNA vaccines prevented 19 million deaths in the first year after they were introduced. This number is likely to be even higher now, as more people have been vaccinated and new variants of the virus have emerged.

Some people argue the industry is too focused on profits and does not do enough to develop new drugs for diseases that affect poor people and people in developing countries. Others argue the industry’s marketing of prescription drugs is misleading and, as mentioned above, it encourages people to take medications they do not need.

The industry deserves to be profitable, but how profitable? The pharmaceutical industry is one of the most profitable industries in the world. In 2022, the top 15 pharmaceutical companies reported a combined profit of $148 billion. This represents a profit margin of 20%, which is significantly higher than the 11% average profit margin for all industries in the S&P 500. By comparison to the 20%, the technology industry profit margin was 15%, finance at 10%, retail at 5%, and consumer staples at 3%.

The pharmaceutical industry is constantly evolving and developing new drugs and treatments. It is likely the industry will continue to play a major role in increasing life expectancy in the years to come. Congress needs to put the needs of citizens ahead of their own needs to get reelected by accepting millions from the pharmaceutical industry.

I wrote much more about this subject in Health Attitude: Unraveling and Solving the Complexities of Healthcare.

Note: I used Bard AI as my co-pilot and research assistant for this blog post. The post is mine. If there are any mistakes, I take responsibility.