Tackling America’s High Drug Prices

President Donald J. Trump signed an executive order in early May directing pharmaceutical companies to lower prescription drug prices to align with those in other wealthy countries. The order, described as an expansion of a first term initiative, aims to address price discrepancies in prescription drugs between the United States and other Organization for Economic Cooperation and Development (OECD) countries. It directs the U.S. Department of Health and Human Services (HHS) to facilitate lowering the price of pharmaceuticals to the “most favored nation” level. gal experts and analysts say that the order may be difficult to enforce.

Americans pay more for their prescription drugs than people in other countries, and drugmakers generate most of their international profits from U.S. sales. Newly released drugs are generally available in the United States market first, but early access is costly. HHS found that between 2018 and 2022, the U.S spent 12.8 percent of its total drug spending on medications released in that 4 year period,  while OECD countries spent 6.9 percent on average.

Rising drug prices in the United States increase out of pocket health care costs, making it difficult to follow prescription regimens. Patients report that, even when insured, drug costs influence their decision to take prescription drugs.

Because prescription drug treatment can improve outcomes for patients with chronic conditions, such as diabetes, high drug costs pose serious public health risks. In a 2021, a survey conducted by the Centers for Disease Control and Prevention found that 18.8 percent of privately insured Americans using insulin reported rationing their insulin because of the cost. Poor medication adherence among diabetes patients is linked to higher complication and death rates, leading to greater strain on the medical system and increased health care spending.

Federal and state lawmakers have proposed and implemented several policies to lower prescription drug cost. Results have been mixed. Federal policy generally aims to cap or limit the growth of drug prices, promote price competition, increase transparency, and encourage drug development. Some states have created drug price transparency programs. Others have passed legislation increasing oversight and regulation of pharmacy benefit managers (PBMs), or creating interstate drug purchasing pools.

There is bipartisan support for lowering the cost of prescription drugs. The Inflation Reduction Act (IRA), which was passed with the support of former U.S. President Joe Biden, requires Medicare to negotiate the prices of certain high cost drugs. The negotiated prices for the first set of drugs covered by the act took effect in January. The Trump Administration has criticized the IRA as overly administratively complex.

U.S. Senator Bernie Sanders recently (I-VT) echoed President Trump’s concerns about the high cost of prescription drugs while questioning the legality of the President’s recent executive order.

Drugmakers reportedly warn that tying U.S. drug prices to those overseas would limit spending on research and development. The pharmaceutical industry has consistently opposed efforts to curb drug costs.

In this week’s Saturday Seminar, scholars evaluate approaches to lowering prescription drug costs.

• The U.S. Supreme Court should hold that federal law does not preempt state regulation of pharmaceutical supply chains, Orly Lobel of the University of San Diego School of Law argues in an article in the Virginia Law Review. Pharmacy Benefit Managers (PBMs) are powerful and profitable intermediaries in what Lobel describes as a “complex and opaque” supply chain. Recent litigation involving Oklahoma’s defense of its authority to regulate PBMs is on appeal before the U.S. Supreme Court, and Lobel argues that the case could determine whether states can regulate PBMs at all. Lobel emphasizes that these regulations are crucial to lowering drug prices.
• In an article in the Journal of Managed Care + Specialty Pharmacy, Ian T. T. Liu of the University of Illinois, Hussain S. Lalani of Brigham and Women’s Hospital, and Aaron S. Kesselheim of Brigham and Women’s Hospital, reviewing the Center for Medicare & Medicaid Innovation’s (CMMI) past drug pricing models, find that four out of nine models were never launched. None of the tested models met the CMMI standard for expansion, (although an insulin cost cap from one pilot was later adopted in the IRA). The authors recommend maximizing voluntary participation, limiting the geographic scope to manageable regions, and adhering to statutory and procedural requirements to minimize future legal challenges and improve the prospects for expanding successful cost-reduction models.
• Professor Marc Rodwin of Suffolk University Law School, in an article in the Cambridge University Journal of Law, Medicine, and Ethics, explains provisions of the IRA that regulate drug pricing and compares Medicare’s pricing regime to other federal programs and foreign systems. Rodwin argues that Medicare’s drug price negotiation authority under the IRA is limited in scope compared to other federal programs like the Veterans Administration and Medicaid and foreign systems. Rodwin suggests that although the IRA applies to a limited set of drugs, it allows for pricing flexibility. He concludes that the success of Medicare’s efforts will depend on its negotiation strategy, and recommends using clear criteria and transparency to ensure more equitable drug
• In an article in the Proceedings of the National Academy of Sciences, Kate Ho of Princeton University and Ariel Pakes of Harvard University examine the disparities in prescription drug prices between the United States and other OECD countries. Ho and Pakes explain that U.S. drug prices are over 250 percent higher than those in comparable nations, subsidizing the global pharmaceutical market. Ho and Pakes propose establishing a single drug price among high income OECD countries. Ho and Pakes argue that this policy, which would condition access to the Medicare market on international companies adopting the unified price, could cut U.S. drug prices nearly in half, raise prices elsewhere, and preserve pharmaceutical manufacturer interest in investing in research and development.
• In a paper in the Institute for New Economic Thinking Working Paper Series, Edward W. Zhou of Bentley University and several coauthors argue that Medicare Part D price-setting should balance the economic returns on private investment with the social benefits from public investment by the National Institutes of Health. The Zhou team highlights that the IRA allows the CMS to consider federal support for drug discovery and development during price negotiations, noting that the National Institutes of Health provided $11.7 billion in funding for the first ten drugs selected. Medicare spent $97.4 billion on these drugs from 2017 to 2021, above their estimated health value of $67.7 billion, indicating that negotiated prices exceed the actual benefits provided.
• In an essay in the Journal of Law and the Biosciences, Holly Fernandez Lynch of The University of Pennsylvania, Rena M. Conti of Boston University, and Jorge L Contreras of the University Utah assess a most favored nation clause in an agreement between Regeneron Pharmaceuticals, Inc., and the U.S. Biomedical Advanced Research and Development Authority. The Lynch team argues that the deal’s benefit to the public is undermined by the inclusion of terms that favor Regeneron. Contract law binds pharmaceutical developers only to the specific language of their contracts, even when that language frustrates the government’s goal of minimizing drug prices. Lynch and coauthors note that companies in similar future agreements could easily evade the announced intent of most favored nation clauses, leaving the government with limited legal recourse. The Lynch Team recommends that the government insist on robust language based on successful precedent in future contracts with pharmaceutical companies.