Markets, Inflation & Drug Prices
We live in a country that once believed in the market system. Unfortunately, Americans forgot just how well markets work to deliver the best goods at the best prices.
It was once the Democrats who wanted a more planned economy where the decisions on investment, production, distribution, and pricing were controlled by the government. In the intervening 40 years, the Democrats have become more market friendly while the Republicans, especially since the beginning of the Trump administration, are all in on intervention and protectionism. As an example, the tariffs Trump imposed are an adverse way to influence market conditions.
A hallmark of a market economy is that the government does not intervene unless a dominant player or players exhibit anti-competitive behaviors. Having an unfair competitive advantage leads to rising prices because there is no check on the ability to raise them. Is that what could be sparking what is going on with drug prices?
One of the indicators of how our current drug markets work are the rebates that Pharmacy Benefit Managers (PBM) receive from drug manufacturers based on the number of prescriptions that health care companies submit. PBMs are the people who “manage” the prescription plans of a drug wholesaler or individual company drug plans. Pharmacy Benefit Managers decide what drugs are covered and negotiate how much the companies and individual policy holders pay.
They also are the ones that negotiate how much of a rebate a manufacturer gives. The rebates can be 20 to 30% of what the costs were. In a perfect world, that money would go back to the health care insurers and then back to the end users, the consumer, to lower the cost. But that does not happen very often. There is sort of a market system in effect, but the consumer is left out of the process.
In most of the rest of the world, the government negotiates directly with the manufacturers to determine the price that can be charged for various drugs. In the United States, Medicare has not been allowed to do so up until now.
A bill passed last week offers new hope in this regard. The law will very, very slowly permit Medicare to negotiate on a few drugs at first and will enable the number of negotiated prices for other drugs to expand over many years. It probably won’t do much for the next decade. Yet that is a market solution.
The United States government, as the largest U.S. medical payer, is using its market position to lower costs. It is a negotiation between buyer and seller. At some point, an agreement will be made between the parties which both will find advantageous.
And don’t be alarmed with the rhetoric about new drug creation being stopped if the manufacturers can’t charge outlandish prices. The government, by paying for healthcare including prescriptions, increases the consumer market by the number of people who are taking advantage of the healthcare system. The government also funds basic bio-medical research and has tax credits for pharmaceutical R&D. All that funding goes toward the ultimate cost of developing drugs.
Should the American taxpayer subsidize the drug manufacturers under the assumption that out-of-control drug prices are the only way new medicines are developed?
Insulin was first isolated from a dog’s pancreas in a lab over 100 years ago and subsequently a patent was issued. The rising costs of a frequently prescribed drug that has been in existence for a very long time has nothing to do with development costs and everything to do with greed.
Markets do work and our political parties need to focus on preserving and expanding the competitiveness of the system. They work even when government is a party as a payer and consumer of a product. One of the causes of inflation are noncompetitive forces in our economy. There are others but this is one of the prime reasons.
