In a free market sellers compete on price and buyers choose the goods with the lowest price that meet their needs. It’s a fundamental law of economics that is immutable — at least in the pristine world of economics textbooks. In the real world the law often crumbles; and nowhere has it crumbled more than in America’s prescription drug market.
It doesn’t take an economist to recognize that drug manufacturers rarely compete on price. This is one reason why, even during a global pandemic, the prices for prescription drugs continued to outpace inflation 2-to-1. And it’s a key reason why this country spent $535.3 billion on prescription drugs last year. It wasn’t always this way. There was a time when health plans and other buyers had some power to negotiate with drug manufacturers to keep prices in check.
In the early 1990s, a series of public policy changes systematically undermined any leverage buyers had to help rein in rising costs. One such change was the Medicaid Drug Rebate Program created by Congress in 1990. Under the program, any manufacturer that wants its drug covered under Medicaid must agree to pay a rebate to the state Medicaid program to essentially create a lower drug cost.
Policymakers created the Medicaid Drug Rebate Program in response to rising drug prices and to help Medicaid receive discounts comparable to what other payers in the market obtain. However, the way the program calculates rebates — requiring that Medicaid receive the “best price” in the market — prevents manufacturers from offering deeper discounts to private purchasers. This, in turn limits potential cost savings for the majority of Americans who rely on private health insurance for their coverage. Instead, manufacturers are only willing to sell drugs to private purchasers at a price they have agreed to sell it to the Medicaid program. In effect, the drug industry is protected by a structural price support.
At the same time the Medicaid Drug Rebate Program was undermining private health plans’ ability to negotiate discounts, those plans began paying for an increasingly larger share of prescription drugs.
Coverage expansion for drugs, even before Medicare started offering outpatient prescription drug coverage for beneficiaries in 2006, means most consumers have become largely insulated from the full price of drugs. While this has protected many consumers and allowed them to afford their medications, patients who are unaware of the full price of a drug face less pressure to choose a lower-priced pharmaceutical (though some health plans come with considerable deductibles and high copays).
Overall, this combination of policies — which discourage real discounts, expand coverage, and insulate consumers from the actual prices of drugs — has allowed manufacturers to raise prices relentlessly with both political and market impunity.
Today, the broken prescription drug market contributes heavily to making health care unaffordable for millions of people. But all is not lost. New approaches, such as allowing Medicare to negotiate some prices where competition is limited or nonexistent, are being considered by Congress, and the following policy options should be considered as well:
The prescription drug market is broken. Patients, care teams, and payers suffer from a tangled web of policies that undermine competition and divorce price from value. But it is not too late.
Looking beyond what may be accomplished in any particular Congress or legislative session, it’s time for our lawmakers to have some serious conversations about the solutions listed above. Patients deserve access to drugs proven to work at prices we all can afford.