Drug prices are declining amid inflation fears

The recent Bureau of Labor Statistics (BLS) report that consumer prices jumped 4.2 percent in the 12 months ending in April fanned inflation fears already smoldering over supply chain disruptions, ransomware attacks and disappointing employment reports. Missing from the suspected causes of this spurt in inflation, however, are increases in prices of prescription drugs. This is remarkable since Congress is considering legislation aiming at limiting drug prices, which supporters have described as soaring or skyrocketing.     

Inconveniently, prescription drug prices, in fact, have been falling. BLS data indicate consumer prices for prescription drugs in pharmacies and drug stores fell 1.8 percent in the 12 months ending April 2020, and this April were 3.1 percent below a peak in December 2019. Importantly, drug prices currently are similar to those of summer 2017, indicating negligible drug price inflation over close to four years. 

That average drug prices have been flat does not mean, of course, that prices for all drugs are unchanged — only that increases in some drug prices are offset by declines in others. Drug prices fall as patented drugs available from only one firm face competition from generic drugs. More generic competition is associated with lower drug prices, an insight that motivated the Food and Drug Administration’s (FDA) drug competition action plan, as well as a related biosimilars action plan. 

People who depend on drugs to treat chronic conditions are unhappy when prices of the drugs they need increase, and prices for some old drug treatments indeed have risen without apparent increases in the costs of manufacturing or raw materials. Prices of insulin, for customers paying cash, rose between 2014 and 2019, posing grave concerns for such insulin-dependent patients. But the case of insulin is complicated by newer, more convenient formulations and dispensers, and activities of middlemen — pharmacy benefit managers — as well as insulin manufacturers, and last year provoked FDA action that may promote competition.  

Legislative proposals, especially bills introduced by Sen. Bernie Sanders (I-Vt.) and some of his colleagues, do not focus on problems in specific poorly performing drug markets and are very broad in scope. One bill would set limits for prices of drugs deemed “excessive” relative to foreign prices; another would have the Secretary of Health and Human Services (HHS) seek lower drug prices for Medicare through negotiations with drug producers, with a “fallback” of median prices paid in some other countries. 

These proposals would overturn a largely successful drug policy paradigm in place since 1984, the Hatch-Waxman Act. That paradigm — conceived by former Republican Sen. Orrin Hatch of Utah and former Democratic Rep. Henry Waxman of California — sought both a healthy flow of new drugs and competitive markets for older drugs after the expiration of patent protections and government guarantees of exclusive markets.  

This paradigm has worked. First, generic drugs are quite inexpensive in the United States. A recent study by the Rand Corporation, sponsored by HHS, indicates that unbranded generic drug prices in the U.S. are less than 70 percent of generic prices in countries such as Canada, France, Germany, Italy and the United Kingdom. Unbranded generic drugs represent 84 percent of the total volume of drugs sold in the U.S. (and generics generally account for nine of 10 prescriptions filled), but only 35 percent of the volume sold in other developed countries. Second, U.S. patients have access to more new drugs than patients in other countries. In 2019, 59 percent of new active substances, a subset of truly novel drugs, were first marketed in the U.S. and no other country came close. 

The broad scope of these bills threatens incentives for research and development. By targeting drugs with high annual sales or high U.S. prices relative to foreign prices, the legislation will affect the incentives to develop many new drugs. Drug developers make decisions based on uncertain future outcomes, so caps on revenue or prices for the successful new drugs will also lower expected revenues on the many products that end up with low annual sales in the U.S. 

In addition, growth in prices of in-patient services at hospitals — and indeed, of all medical services — greatly exceed growth in drug prices, and the consumer price inflation generally. 

If Congress is interested in reducing costs to Medicare and its beneficiaries, it should focus on the relatively more important areas such as medical services, where price increases are greatest and cost controls need not deter innovation. 

Randall Lutter, a senior fellow at the Manhattan Institute, served as senior science and regulatory adviser in the Food and Drug Administration’s Office of the Commissioner from 2017 to 2020.