The Truth About Price Controls and Prescription Drug Spending

Price controls have a long, but very unsuccessful history. They have repeatedly proven to cause shortages and/or excesses and spur the creation of black markets all while failing to solve the actual problem they were meant to address. This is not new information. It is and has been a principle widely accepted by economists. Unfortunately, with the recently signed Inflation Reduction Act, President Biden and some members of Congress haven’t gotten the memo. 

When looking at the data, the tale of rising drug costs doesn’t hold up. When accounting for rebates and discounts, brand-name drug prices have actually declined for the past few years. Cigna (Express Scripts), the country’s second-largest pharmacy benefit manager (PBM), released a report a few months ago that showed their increased spending (75%) on prescription drugs in 2020 was mostly due to increased use, not a dramatic rise in prices. The Express Scripts report showed that when you take into account rebates, drug prices rose only 0.9% in 2020—well below the inflation rate. 

So, if the manufacturers’ drug prices are not going up, why are many Americans struggling to pay for their medicines? Cost-sharing measures and coinsurance provisions utilized by many PBMs and insurance companies are driving up out-of-pocket spending for many. In addition, PBMs and insurance companies often take a portion of the rebate given by the manufacturer themselves instead of passing the full amount on to the patient.

For example, an otherwise healthy friend of mine was recently prescribed a specialty medication that costs almost $60,000 per year. Her employer-provided insurance plan had a coinsurance requirement of 15% leaving her responsible for $9,000 per year or $750 per month. Insurance companies utilize coinsurance and other cost-sharing measures to keep premiums low. This isn’t a problem if you’re a healthy individual, but for those that are diagnosed with cancer or other diseases with expensive treatments, it can be crippling. 

The President and some members of Congress want to address the problem by capping the price of certain drugs. The recent Inflation Reduction Act imposes price caps on insulin. Insulin is a critical drug for those with diabetes. High out-of-pocket costs and large profits for manufacturers of insulin have been cited to urge policymakers to cap the price of the drug. 

But the annual net costs of the most commonly used insulins have actually decreased since 2007. Improvements in the quality of insulin, however, have increased and are now more similar to those naturally occurring in our bodies. In addition to improvements in effectiveness (They are now longer acting) and convenience, costs have gone down. A 2021 study found that the average annual net costs of the most commonly used insulins have declined by 20% since 2007.

The same study also found that the percentage of total spending on insulin going to drug manufacturers decreased by 33%, while the percentage going to PBMs increased by 155%. This statistic among others makes the claim of drug manufacturers rolling in huge profits fairly dubious. 

You may not realize that the money going to manufacturers or PBMs changes the price many Americans are paying out of pocket, but it does. Cost-sharing measures like copays and coinsurance are often based on the list price of the medication—not the price the health plan actually pays for the drug with discounts and rebates. Thus, many patients are paying more for insulin despite the average net price going down

Price controls on prescription drugs have been attempted before. In 1990, the federal government passed legislation limiting the cost of drugs for state Medicaid programs. While the limits varied for different drugs, it often required the lowest price available to any other customer. This resulted in reduced discounts and incentives for private payers instead of lowering the cost to Medicaid. 

The economics behind a free market economy is very clear. Prices are set by supply and demand and adjusted accordingly. When the government tries to manipulate prices, it distorts those principles and rarely, if ever, accomplishes the real goal. We can see examples of this throughout history. From the Roman Emperor Diocletian to the early Puritan communities of the 1600s to modern-day rent control laws, each and every experiment with price controls has failed—often spectacularly. 

With this history of failure, it is all the more baffling that legislators and policymakers continue to push for price caps on prescription drugs now. If legislators want to reduce the costs of drugs, including insulin, they should focus on looking at the pharmaceutical supply chain and where the out-of-pocket costs are actually coming from instead of trying to manipulate the market.

For more information from ALEC on the dangers of price fixing on prescription drugs, check out our report, Price-Fixing Prescription Drugs Will Cost Us in Cures.