Voluntary Drug Price Restraint Didn't Work in the 1990s, and Won't Now
In late May, President Trump announced that, within two weeks, major pharmaceutical companies would agree to large, voluntary price concessions. Restraining drug prices was a major theme of Trump’s campaign for the presidency, so it is not surprising that he is eager for some prominent drug manufacturers to publicly signal plans for holding prices down, for which he will then claim credit.
Trump isn’t the first president to pressure drug companies on their prices. Bill Clinton campaigned on ending pharmaceutical “price gouging.” Once in office in 1993, he and First Lady Hillary Clinton proposed limits on drug price inflation in their health reform plan. They also wanted to create an independent panel to oversee the industry’s pricing decisions.
The Clinton plan rattled drug manufacturers. To slow the plan’s political momentum, several major companies stepped forward in early 1993 and said they had “turned over a new leaf” on pricing. For three years, they would keep aggregate price hikes within the general rate of inflation, which the industry estimated would save consumers $7 to $9 billion during that period.
The drug industry’s 1993 commitment to voluntarily price restraint had no lasting effect on what Americans pay for drugs, but it may have contributed to the demise of the Clinton reform plan. The push for government-enforced drug price controls began to fizzle in 1994 as the economy improved and more Americans gained insurance coverage. The industry’s voluntary efforts also may have reduced the effectiveness of the administration’s criticisms with voters. As the year wore on, Democrats in Congress began to abandon the sinking Clinton reform plan, which failed to pass in either the House or the Senate. Republicans then took control of Congress in the mid-term election.
After the failure of health-care reform in 1993–94, the Clinton administration never regained momentum on drug pricing, and nothing meaningful was put into law during the remainder of the president’s time in office. Drug price inflation did slow temporarily in the mid-1990s, falling from 3.3 percent in 1993 to less than 2 percent in 1995. But beginning in the late 1990s, prices surged, rising by an average of 5 percent annually over the period 1998 to 2002.
Voluntary price concessions don’t work because they are always temporary in nature. Even if they produce short-term results, later price hikes can make up for the lost ground, and then some.
It is also easy for the industry to make promises that sound good but don’t amount to much because of the many different ways drug companies can alter their revenue streams. What matters to these companies is their total revenue, which is a function of overall sales and net prices.
Drug manufacturers sell to both public and private payers, and offer various discounts based on what will maximize their sales and profits (as they should). They can promise to hold retail prices below a fixed rate and still boost revenue by limiting the discounts and rebates they offer at various points in the supply chain, or by offering lower net prices only when sales hit certain milestones. They can promise to restrain prices for public purchasers and for the beneficiaries enrolled in publicly-sponsored insurance, and then raise prices for their commercial customers. Further, they can make up for revenue lost from low annual price hikes by setting their initial prices higher for new products, by running up prices just before voluntary restraints take effect, and by repackaging existing products in ways that make prior year comparisons difficult.
In addition, anti-trust law will be a major obstacle to a serious industry-wide effort. Drug company executives working together to collectively set prices for their products over a multi-year period would seem to be a textbook example of anti-competitive behavior, and thus vulnerable to litigation. Consequently, it is more likely that individual companies will devise their own voluntary price restraint pledges, which may or may not match up with the commitments of other companies. The combined result is likely to be less meaningful than a uniform, industry-wide commitment would be.
It has been more than a month since President Trump teased the prospect of voluntary price restraint by the drug industry, and there’s still no sign of an imminent announcement. That doesn’t mean there won’t be one eventually. In fact, if anti-trust concerns can be addressed (a big “if”), it is probably in the interest of the drug companies to give the president something that he can call a “win” because, as was the case in 1993, a low-cost, voluntary effort might head off worse outcomes for the industry.
The president’s point person on drug pricing — the Secretary of Health and Human Services, Alex Azar — has downplayed what might come from voluntary restraint by the industry, even as he has also issued warnings that companies announcing big price hikes will come under additional scrutiny. In recent days, several companies have signaled relatively large price hikes for their products for the second half of this year, which may be an indication that they don’t consider themselves particularly vulnerable to unilateral action by the administration.
The failure of voluntary price restraint by the drug industry in the 1990s isn’t likely to dissuade President Trump from wanting to secure a public commitment to lower prices from the drug industry. The public relations value of a White House event with pharmaceutical executives pledging price cuts, no matter how illusory, is probably too appealing for this administration to resist.
There are no simple solutions to high drug prices, which are primarily a function of the nation’s patent and drug safety laws. Companies that can bring effective and innovative therapies to market are rewarded with a limited period of strong pricing power. The purpose of these laws is to encourage companies to take the necessary risks to research and develop products that can deliver substantial health benefits to patients. The only way to hold down prices without simultaneously compromising the incentive for medical progress is to encourage more product competition where that is possible while also allowing purchasers to combine their buying power in order to increase their leverage with the manufacturers of patented products.
Azar and his aides are pursuing a number of initiatives that might eventually, if refined and improved, create more downward pressure on the prices of pharmaceutical products. But their plan is complex, still in development, and won’t produce noticeable results for consumers anytime soon.
That timeline is unlikely to satisfy an impatient president. He wants a quick and high-profile “win.” But history shows that the primary beneficiaries of the price restraint announcement from the drug industry that he craves might turn out to be the drug companies themselves.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.