Big Pharma's Get-Out-of-Jail-Free Card

The Inflation Reduction Act is being hailed for getting tough on drug companies. In fact, they'll make out just fine by raising prices on everyone outside Medicare

A brief pause from my August break to comment on an issue largely ignored by the mainstream media.

Big Pharma got a big boost from Senate Republicans last weekend. By refusing to extend the drug price controls in the Inflation Reduction Act to the private insurance market—or allow a cap on insulin prices for people not on Medicare—they levied a $300 billion–plus tax on private employers and the 180 million people they insure.

Sure, taxpayer-financed Medicare under the Democratic-passed bill will save that much money over the next decade. And those savings, which come mostly from Medicare negotiating prices for a handful of costly drugs and limiting its payments to insurers and pharmacy benefit managers, will help battle climate change, maintain the subsidies for Obamacare policies sold on the individual market, and limit seniors’ out-of-pocket drug expenses to $2,000 a year.

But by refusing to overturn the parliamentarian’s ruling that the bill couldn’t extend drug price controls to the private market, which covers workers and their families under age 65, the Senate allowed drugmakers to shift costs. When government programs pay less, the private market pays more—often a lot more.

“Since the measures will now apply to Medicare only, the legislation would actually increase prices for those with commercial coverage,” the Purchaser Business Group on Health and a coalition of employer-sponsored plans said shortly after the Senate vote. This would be “above the unsustainably high prices they’re already paying, as costs are shifted from Medicare to employer plans.”

The widening spread between public and private health care prices, which stands at close to three to one for many hospital and physician services, will be extended to the prescription drug market, where the annual cost of the latest medicines has soared above six figures. How long will it be before many employers look longingly at Medicare and say, to borrow a line from When Harry Met Sally, “I want what they’re having”?

Despite the likelihood that private employers will absorb huge price increases by Big Pharma, congressional Democrats and President Joe Biden hailed the legislation. Meanwhile, the Pharmaceutical Research and Manufacturers of America stuck to its bankrupt position that “sweeping government price-setting policies will threaten patient access and future innovations.” The Biotechnology Innovation Organization declared that the legislation would send the U.S. “back into the dark ages of biomedical research.”

No evidence to back Big Pharma’s claims

That hysterical rhetoric flies in the face of a recent study by the Congressional Budget Office that dismissed that risk, even after assuming that government price controls would reduce industry revenue. The CBO concluded that a reduction in drug industry revenue three times the size of the one in the legislation would cut the number of new drugs by just two over the next decade, which is a decline of one-half of 1 percent. The FDA approves, on average, about 40 new drugs a year.

But even that scenario is unlikely, given the legislation’s failure to extend its price controls to the private sector. In a recent article in JAMA, researchers Rena Conti, Richard Frank, and Len Nichols raised the alarm that the “passage of a Medicare-only policy will cause pharmaceutical companies to increase the prices of drugs paid by commercial insurers and their beneficiaries.” In other words, they would engage in cost shifting to protect their revenue stream.

The researchers debunked the standard economic model that suggests Big Pharma already maximizes profits for private-sector demand. That model suggests that even if prices fall in the government market, demand in the private market will remain unchanged. Thus, private prices will remain the same.

That totally ignores the fact that most drugs subject to Medicare price negotiations starting in 2026 will be patent-protected monopolies, with few or no therapeutic alternatives. Most will also be administered in clinicians’ offices, where patients don’t make purchasing decisions, and insurers are reluctant to limit physician choices. “Demand will remain strong for these products, even if prices go up,” the researchers argued. “Consequently, commercial plans will continue to face a seller with monopoly pricing power for many drugs.”

Non-profit alternatives on the horizon

The good news for the seven million Americans requiring insulin daily is that they will soon have an alternative that’s as good or better than the $35 monthly cap on out-of-pocket insulin expenses for Medicare recipients. CivicaRx, a nonprofit drug company launched by a consortium of health systems and insurers, is on track to introduce low-cost competition for the three branded insulin products in 2024. Its work is backed by the Juvenile Diabetes Research Foundation and other advocacy groups.

CivicaRx aims to price its generic alternatives at $30 per vial, or about a tenth of the price of branded products. (Depending on the severity of their disease and their insulin resistance, diabetics use from two to six vials of insulin per month.)

“The bill does not impact those who are commercially insured, under-insured, or uninsured,” a spokesperson said via email. “Our projections [for sales] remain to be determined, but our focus is on having a market impact.”

This article originally appeared yesterday on the Washington Monthly website.