An Easily Forgotten Point: Price Is Not the Same as Spending

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by Jim Geraghty

The gang over at the Institute for Policy Innovation has completed a study making a basic, but easily overlooked point: Efforts to control prescription-drug prices by setting prices through a government mandate are not likely to control overall prescription-drug spending.

“Congress imposed price controls on Medicare-covered hospital stays (Part A) in the early 1980s, and on physician services (Part B) in the early 1990s. Neither has had a long-term effect of controlling Medicare spending,” the study notes. “By contrast, Medicare prescription drug benefit (Part D) spending has grown at a much slower pace than predicted, only increasing about 2.3 percent per person annually between 2010 and 2018 — even with the addition of the baby boomers retiring in large numbers.” The IPI report attributes the slower rate of increase to voluntary negotiations between private sector companies. Once the government sets a price at a particular level and freezes it, demand increases. The government ends up spending more, even with a measure in place designed to save money.

The other big side effect of this in the realm of prescription drugs is less money available for future research. Higher costs are part of the process fueling innovation and the development of more complicated drugs; simple drugs have easy formulas that generic manufacturers can adopt to make much less expensive copies of a branded drug when the patent expires. More complicated drugs like biologics are much more difficult to develop, manufacture, transport, and replicate — so even when the patent expires, generic manufacturers can’t quite reduce prices as much as they could for the simpler drugs.

“The more complicated it is to make a drug, and the fewer patients to pay for it, the more expensive each drug will likely be. It’s not profiteering; it’s math,” the IPI report concludes. “However, just because some of the newest and most innovative biologics can be very expensive doesn’t necessarily mean that prescription drug spending is rising quickly, because, as mentioned earlier, price is not the same as spending.”

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