Free Market Competition Will Lower Drug Prices, Not PBMs

Recent news about the availability of pharmaceuticals is alarming. According to the latest listings from the Food and Drug Administration (FDA), more than 130 drugs are “currently in shortage.” A recent POLITICO headline put it succinctly: “Wanted: A drug shortage fix.”

It’s a problem that requires decisive bipartisan action and a multi-prong approach to remedy.

Media blame is largely falling on the pandemic hangover, which has left supply chains strained. But government policies have done little to correct the headache. In fact, some argue that lawmakers have exacerbated the issue. According to former FDA Commissioner Scott Gottlieb, the Inflation Reduction Act (IRA)—federal legislation that was passed and signed into law last year—is a chief culprit.

Among other components of the legislative package, the law applies price controls onto some prescription drugs accessed through Medicare. More specifically, the Department of Health and Human Services (HHS) is empowered to use the full weight of the U.S. government to “negotiate” the price at which certain drugs are acquired for Medicare recipients.

But as you can imagine, a private company “negotiating” with the federal government is not a negotiation at all. The result is more like highway robbery—leaving drugmakers in a financially impossible situation.

Developing a new medicine is an extremely expensive undertaking—on average costing more than $2 billion, and rising. If drugmakers are forced into offering their products at below market rates because of government price manipulation, recouping that research and development investment becomes a pipe dream.

As a result, the incentive to innovate and develop new lifesaving treatments, therapies, and vaccines fades—harming the very patients the government is attempting to help. In fact, a study released earlier this month finds IRA price controls will cut the number of new drugs coming to market by 40 percent over the next 10 years.

Estimates become even more bleak if proposals to double down on government price manipulation come to fruition, a misguided idea that comes in the form of President Biden’s Fiscal Year 2024 Budget and the Senate’s Smart Prices Act. If implemented, 237 fewer drugs or uses will be approved by the Food and Drug Administration (FDA) over the next decade. Patients battling cancer, neurological conditions, and rare infectious diseases will be the hardest hit.

But this crisis is far from a flash in the pan. It’s a problem that’s been building for years. The price controls implemented by the IRA have piled on to a more established underlying factor behind the shortages—Pharmacy Benefit Managers (PBMs)

These entities have a stranglehold on the healthcare system. PBMs decide what drugs are covered by health insurance plans and are therefore available to patients at the pharmacy counter. And in a healthy market, dynamic competition between middleman entities would provide patients with a wide range of choices.

But that’s currently not the case. Four PBMs control nearly 70 percent of the market and according to a report from the American Medical Association, 78 percent of states have highly concentrated PBM markets.

Not only does the consolidation make it easier for medications to be easily squeezed out of the line-up—leaving patients with fewer choices and softening the ground for shortages—but the PBM scheme further jeopardizes revenue streams for innovative drugmakers. PBMs act as gatekeepers to the consumer market, and if drugmakers don’t pay up by providing huge rebates that are pocketed by the middlemen, the products can’t—to borrow a board game term—pass go.

Americans are facing a healthcare crisis as key medicines run in short supply. Policymakers in Washington need to walk back—or at the least avoid doubling down on—harmful price controls while tackling the anti-competitive practices of supply chain middlemen to help restore the availability of lifesaving pharmaceuticals.

Free market competition and innovation is the prescription Americans need.