Patients in the United States pay exorbitant prices for prescription drugs. U.S. prices for prescription drugs are 256 percent of those in other industrialized countries—the highest prices in the world for the same drugs. The pharmaceutical industry argues that Americans directly benefit from low pricing regulations because this facilitates access to new drugs and that lower prices will reduce patient access to drugs. Expert analysis shows that other countries with meaningful drug pricing regulations actually have proportionally greater pharmaceutical innovation than the United States.
Current laws incentivize drug companies to put profits over patient benefits. Unlike other industrialized countries that use different systems—including negotiation processes—to ensure affordable drug prices, the United States allows drug companies to set prices at whatever level they think will make them the most money. Although drug manufacturers must provide discounts for drugs paid for by programs such as Medicaid, Medicare—which spends $105 billion on drugs a year—is legally prohibited from negotiating drug prices. Even private insurers have less ability to press for discounts due to drug companies’ monopoly power. These high prices harm patients’ health and exhaust federal, state, and private health care payers’ resources.
Legislation such as H.R. 3—the Lower Drug Costs Now Act—would allow the U.S. Department of Health and Human Services to negotiate prices directly with drug companies to lower the cost of drugs. The bill ensures that both Medicare enrollees and privately insured patients will benefit from these prices, and it establishes an upper limit of 120 percent of the drug’s average price in several peer nations if drug companies refuse to come to the negotiating table.
According to Congressional Budget Office (CBO), Medicare would save around $448 billion over 10 years using this approach. H.R. 3 also limits price increases at the rate of inflation, preventing exorbitant increases in the price of drugs. Opponents claim this loss of revenue by drug manufacturers will significantly reduce drug innovation, reducing patient access to drugs. The reality, however, is that drug price negotiations can promote drugs that benefit patients—not just drug company profits.
Federal investment would promote truly valuable drug research
The industry’s approach to drug development is focused on what will make them the most money. A recent CBO report found that drug manufacturers decide how to spend on research and development based on expected profits. Pharmaceutical companies develop drugs to generate gains on their investment—not to develop significantly improved treatments. For example, of the 47 new drugs approved in 2017, more than one-third had no additional health benefits over those already approved.
In addition to the impact that price negotiation can have on drug development through pricing, the federal government also influences drug development in the early stages. H.R. 3 would increase the level of funding by using part of the savings from Medicare negotiation to reinvest in basic drug research.
First, H.R.3 invests billions of dollars into the National Institutes of Health (NIH) Innovation Projects. Established under the 21st Century Cures Act, the four projects are:
In addition to the NIH Innovation Projects, H.R. 3 would establish a pilot program to help fund later-stage clinical trials for high-need cures—drugs for which existing financial incentives are unlikely to develop. Under this project, the NIH would grant contracts to drug companies seeking to develop these drugs. Examples of the innovation that federal investment can induce include the COVID-19 vaccines used in the United States, all of which were built on federally funded research.
These targeted investments will help ensure that valuable drug innovation will continue under a negotiation approach to drug pricing. Rather than allowing pharmaceutical companies to direct research at what will maximize their profits, investing the savings accrued through Medicare negotiation will ensure that drug companies focus on the health needs of the American people.
American patients and insurance programs pay the highest prices for prescription drugs in the world, which makes U.S. health spending less efficient and hurts patients’ health. Under a negotiation approach that also reinvests savings in critical medical research, prescription drugs will be more affordable and accessible to patients.
By reinvesting the savings that Medicare negotiation would achieve, the federal government can ensure that drugs that eventually reach the market reflect the needs of the public and are priced at an amount that is affordable.
Gabriela Gutierrez is a former intern for the Health Policy team at the Center for American Progress and a student at the University of Richmond. Thomas Waldrop is a policy analyst for Health Policy at the Center.