Would Government Intervention Reduce Drug Costs?

Pharmaceutical manufacturers have been under fire over the past decade due to high drug costs, including widespread outrage over the recent EpiPen pricing scandal.

These companies have long been exposed to the criticism of individuals who claim that certain specialty drugs, such as novel hepatitis C virus and cancer treatments, are too costly for a majority of individuals to afford.

Certain proposals to lower drug costs have become problematic. Approximately 75% of Americans want government intervention to lower drug costs; however, the United States has not experienced the market failure that would require such intervention, according to an opinion piece from the American Action Forum.

Advocates for keeping the government out of prescription drug pricing argue that price increases are just under 2% per year, which is in-line with the annual inflation rate, the authors noted. National spending on prescription drugs has stayed at approximately 10% since the 1960s, and has not increased as much as critics say.

According to the article, the Affordable Care Act may play a role in out-of-pocket spending, since the health law incentivizes insurers to limit the drugs they cover. For a drug that is on a high tier, or is on the formulary exclusion list of the corresponding pharmacy benefit manager (PBM), patients will have to pay increasingly high costs, despite relatively low increases in actual sale price.

Compared with the Affordable Care Act, it is clear that the Medicare Part D prescription drug plan is a very successful entitlement program, the authors noted. Part D involves competition between PBMs and private drug plans to decrease costs, promote generic drugs, use formularies that promote affordable branded drugs, and offer cost-saving tools.

The negotiation and the competitive nature of this program illustrates why Part D consistently comes in under its projected costs, according to the opinion piece. More than 85% of Part D beneficiaries also report satisfaction with their coverage and costs, which reinforces the fact that the competition helps lower costs, the article stated.

With Medicare Part D as an example, calling for the government to intervene and take part in negotiating drug pricing could potentially have no impact, according to the article. PBMs and private insurance plans use formulary lists to prioritize lower-cost drugs, but the government cannot engage in this practice.

Private insurance companies already have enough market power to lower drug costs using these methods, so implementing additional responsibilities for the government would likely be ineffective, the authors noted. Providing incentives for transparency and Medicaid-style rebates for Part D would only raise costs for individuals, instead of doing the opposite.

To reduce costs without government intervention, negotiations and competition are needed among manufacturers, insurers, PBMs, and employers that reflect the activities of Medicare Part D, the article concluded.