The Simple Solution To Lower Drug Prices for All Americans

A woman in Los Angeles takes insulin to treat diabetes, October 2010.

Last month, 43 states and Puerto Rico sued drug companies for inflating prices by up to 1,000 percent from 2013 to 2015. The lawsuit alleges the unlawful practice of price fixing. But even without collusion, drug companies gouge patients and taxpayers for one simple reason: They legally can.

The price hikes affected the cost of more than 100 generic drugs that treat cancer, diabetes, HIV, arthritis, and other conditions. Far from unusual, they are part of a pattern. Insulin, for example—a drug that treats diabetes—has existed since the 1920s. Between 2012 and 2016, the average price of insulin nearly doubled. This price gouging has led some patients to ration insulin doses, a matter of life and death.

A few years ago, it was EpiPen—the injection for life-threatening allergic reactions—in the headlines. Mylan, its manufacturer, had raised the price from $100 to more than $600 since 2007, before the first generic version was approved. These examples illustrate the dire need for bold legislation that addresses these egregious price hikes, the burden of which falls on consumers.

Drug companies inflate prices of both old and new drugs

Drug companies routinely hike prices on an annual basis—well beyond inflation—for drugs that have been on the market for years. Although they claim that their high prices finance research and development necessary for innovation, these drugs are fundamentally the same as they were years ago.

Drug companies also charge excessive prices for newly developed drugs—for example, the latest drugs to treat opioid use disorder.

Although medication-assisted treatment is considered essential to combat the opioid epidemic, only about 20 percent of patients receive it. In the past few years, extended-release forms of these drugs have come onto the market, which may increase convenience for patients, as they do not need to be taken as frequently. Clinical studies indicate that these new drugs provide comparable or marginal benefits compared with the existing treatment, but they cost up to $12,000 more per year. If these drugs were priced according to a commonly accepted standard of value, independent economists estimate that governments could afford to treat their entire eligible populations.

For both old and new drugs, the problem is simple: Drug companies enjoy monopolistic market power. Even when drugs are off patent, the market is often broken, with few competitors. As a result, drug companies are free to set prices as high as they possibly can, with little regard for these drugs’ added therapeutic benefit to patients.

A proposal to solve the problem

Although drug affordability is a top concern of the public, the congressional majority in the U.S. House of Representatives is divided on the path forward. There’s a simple solution for lowering prices of both old and new drugs for all Americans, not just for seniors under Medicare: a windfall profits tax that takes back surplus profits derived from excessive prices. This tax would be equal to the difference between a drug’s list price—the price that is used for patient payments—and the drug’s justified price, multiplied by the number of units sold.

In order to determine the justified price of new drugs, an Institute of Drug Assessment within the National Institutes of Health (NIH) would assess their value. This assessment would account for factors such as a drug’s therapeutic benefit compared with existing treatments, including for demographic subgroups; the disease burden targeted by the drug; the effect of the drug in addressing unmet patient needs and health inequity; and affordability.

Drug companies would be required to submit to the institute a dossier of clinical evidence that speaks to the drug’s benefits and risks. The institute would also consider clinical studies, economic analyses, input from a council of citizens, and public comments. If clinical evidence is lacking, the institute could contract with academic research centers for independent studies—a function with which the NIH has ample experience.

On the basis of this assessment, drug companies would negotiate prices with the secretary of the U.S. Department of Health and Human Services (HHS). But if they could not come to an agreement, the institute would determine the new drug’s justified price.

For all old drugs, the baseline assumption would be that the justified price is the average price charged in peer countries that evaluate a drug’s value. Because there are important demographic and health differences between the United States and other countries, HHS or the council of citizens could refer a drug to the institute for review, resulting in a departure from the baseline. Annual price increases for old drugs would be justified only if they were less than a measure of inflation.

In all cases, the windfall profits tax—which would apply if a drug’s list price exceeded its justified price—would serve as a deterrent. There would be no reason for a drug company to price above the justified price because any profit from doing so would be recovered. But in the event that the tax was triggered, revenues would be rebated to consumers.

Conclusion

Nearly 1 in 3 Americans reports that they have not taken medicine as directed due to the cost. Congress must act on legislation that meets the scale of the problem; it is time to treat skyrocketing prescription drug prices as a national emergency.

Topher Spiro is a senior fellow and vice president for Health Policy at the Center for American Progress.