Drug pricing reforms should focus on expanding choice, not imposing more government controls

As President Biden’s recent State of the Union address made clear, drug pricing will remain a top policy issue for the foreseeable future. The president is correct that something must be done, but his proposals are wrongheaded and will only make things worse. Instead of focusing on government price controls, Congress should remove the obstacles limiting patient control and choice.

The claim that prices are lower, and quality is higher, when consumers have more choices is typically uncontroversial. Yet, for some reason this basic economic logic is lost when it comes to purchasing the medicines that patients need to live long, healthy lives. In the case of the drug market, intermediaries (whether they are insurers, government or employer payers, or pharmacy benefit managers (PBMs)) claim they can ensure better prices on medicines by restricting patients’ choices.

On its face, this logic is absurd. Imagine local grocers telling customers that negotiating the best prices for milk, eggs or potato chips requires them to reduce the number of choices in their stores. Instead of having many brands of groceries, there would only be one. How many people would patronize such a store?

Despite its irrationality, industry intermediaries use the drug formulary for this very purpose. The drug formulary is the list of approved medicines that detail which drugs are covered and under what terms. Drugs are prioritized on the formulary to encourage the use of certain drugs. Drugs listed on worse formulary tiers receive inferior coverage, and patients will generally have no access to the drugs that are excluded from the formulary entirely.

Drugs listed on the most favored formulary tier do not necessarily offer patients the best combination of price and value, however. Take the coverage of biologic medicines as an example. Biologics are high-value medicines that have improved outcomes for patients living with devastating diseases such as cancer and auto-immune disorders. Developing and producing these drugs is costly because these medicines are complex therapies derived from living organisms.

Competitors to originator biologics exist (i.e., biosimilars) that are just as clinically efficacious and 40 percent to 60 percent less expensive than the originators. However, far too many drug formularies place biosimilars on worse tiers, denying patients the opportunity to use these medicines. As a result, the formulary restrictions reduce patient choice and force patients to pay higher costs.
The situation is even worse when drugs are excluded from the formulary altogether. According to a  report by consulting firm Xcenda, this practice has been exploding with the three PBMs that account for three-quarters of all prescriptions processed excluding “nearly a thousand prescription medicines” from their formularies since 2014 — a 679 percent increase!

As Xcenda noted, many adverse consequences can result when formulary policies force hundreds of thousands of patients to switch from their current medications to their PBM’s preferred drug. These costs are more severe for patients living with chronic diseases who must take their medicines continuously for a long time and include “worsening health outcomes and increased utilization of costly emergency and hospital care.”

Another restriction on choice happens due to a practice known as “white bagging.” White bagging restrictions prevent medical practices from choosing their preferred drug suppliers. Instead of purchasing medicines directly from a manufacturer or the pharmacy of their choice, the industry intermediaries require the prescribed drug to be dispensed from specified specialty pharmacies, which are often owned by the PBM.  

As the North Carolina Oncology Association noted, the practice of white bagging “can endanger patient care by potentially bypassing safety checks, introducing dosing errors, delaying treatment, and interrupting care planning processes.” Yet, the practice is accelerating. In a spring 2021 survey of the Association of Community Cancer Centers (ACCC) membership, 87 percent of respondents said white bagging is “an insurer mandate for some of their patients.”

The practice of white bagging is another example of how industry intermediaries are reducing choice to the detriment of patient welfare. In this case, the choice of where to source the drug is restricted rather than which drug can be prescribed.

These examples demonstrate that reforms are needed. Rather than imposing arbitrary price controls, beneficial reforms eliminate the inefficiencies and disincentives that pervade the health insurance and drug supply chain with the goal of improving choice and eliminating unnecessary access barriers.

Wayne Winegarden, Ph.D. is a senior fellow in business and economics as well as director of the Center for Medical Economics and Innovation at the Pacific Research Institute.