Virginia’s drug price control bill is the wrong prescription
If you can’t afford health care, you are effectively denied it. That’s why addressing elevated prescription drug costs should be a priority. But the question is what’s the best strategy to drive medicine prices down for patients? Some state lawmakers mistakenly think they have the answer: price controls.
Proposed state legislation would create a Prescription Drug Affordability Board that has the power to set price ceilings for medications. Who would sit on the board? Members would be appointed by the governor with the only guardrail being they can’t be directly tied to pharmaceutical companies. What about limitations for appointing those connected to insurance companies, large hospital systems or drug supply chain middlemen? These are the entities responsible for driving up costs.
Do Virginians really want the fox in the henhouse?
Besides the shortsightedness of the board’s structure, history provides countless examples that show the negative repercussions associated with government price setting — ranging from modern-day rent controls that trigger housing scarcity to the Roman Empire. In the 4th century B.C., the Romans instituted price controls on grain, which predictably led to shortages and harmed the very citizenry the policy was intended to help.
That’s why the Association of American Physicians and Surgeons opposes the bill in Virginia. The group argues drug price controls “are proven to cause shortages and reduce quality” — compromising patient access to new lifesaving treatments, therapies, and vaccines. It costs approximately $2.6 billion to bring a new drug to market, and needed R&D budgets will shrink if investors don’t believe they will get a return. In fact, some drug makers have already scaled back their investments in new cancer therapies due to the Inflation Reduction Act, federal legislation that controls the prices of some Medicare drugs.
To lower costs without threatening innovation, we need to cure the disease, not the symptom. And to the chagrin of the bill’s proponents, drug makers are not responsible for rising prices. Ballooning medication costs are a result of an opaque purchasing system involving insurance companies and the middlemen of the drug supply chain called pharmacy benefit managers (PBMs).
Research by U.S. Rep. Buddy Carter, R-Georgia, a former pharmacist, finds that only 31% of branded drug sales actually go to drug makers. The lion’s share goes to PBMs that should be the true target of lawmakers’ reform efforts. One analysis finds that if you strip out the extra expense created by PBM schemes, net drug prices have actually fallen in recent years.
PBMs operate between drug makers and health insurers and have created a pay-to-play medication cartel that drives up prices. PBMs demand manufacturers pay them enormous rebates — often around 50% of underlying drug prices — to access insurers’ formularies (a.k.a., the list of drugs insurers promise to cover). PBMs also engage in a practice called “spread pricing” where they charge patients — or their insurance company — more than what is paid to dispense the drug. The difference is pocketed as profit.
One Nebraska father of a diabetic son accurately describes this pricing system as “legal extortion.” His sentiment isn’t surprising when you consider that analyses find rebates boost insulin prescription prices from $52 to $350 and $86 to $425. Taxpayers, in general, are also getting whacked. A 2018 report from Ohio’s state auditor found that PBM spread-pricing behavior cost the state nearly $225 million.
Such kickback schemes are illegal in almost every other part of the economy. Unfortunately, Congress granted PBMs a safe harbor from anti-kickback statutes. As a result, rebates have more than doubled over the past decade to $236 billion, accounting for approximately half of the entire prescription drug market.
History tells us government price controls don’t work. Instead of repeating failures of the past, Virginia policymakers should return to the drawing board. To address rising medicine costs, state lawmakers should inject price transparency into the drug supply chain while addressing the PBMs that are gaming the system at the expense of patients struggling to afford medicine.