New York Times Piece on Drug Market Ignores the Data (and Reality)

Good policy should be based on a foundation of solid evidence. The opposite is also true: bad policies come from flawed evidence. A recent New York Times Opinion Essay based on research funded by drug industry critics is a prime example of the latter, as it uses politically expedient scientific shortcuts to justify its call to have the government set the price of new treatments and cures. This is not just an academic argument, however, because the consequences could hurt patients.

The essay, and the research on which it is based, focuses on the prices of medicines when they hit the market. But focusing solely on launch prices ignores the entirety of the competitive market for medicines. Between 2015 and 2020, spending on newly launched medications was $87.7 billion, but this spending was offset by more than $93 billion in savings from new medicines that went generic. New medicines pave the way for generics, and this process shows a functioning market. To neglect this reality is to ignore the benefits of drug innovation and the potential consequences of price controls.

Bypassing the fact that the net price of existing brand-name drugs has increased by less than the rate of inflation over the last five years, the authors of the research and essay compare launch prices of today’s new medicines to those launched 13 years ago. But that is like comparing a flip phone to a smart phone, as if no innovation occurred in those 13 years. The reality is that new drugs bring more innovation and keep people healthier for longer.

Many of the essay’s shortcomings originate in the research on which it was based. One of its biggest flaws was failing to control for the variation in new drugs that launch each year. Relying upon a market basket of drugs that changes every year, and that includes drugs used by very small patient populations, is a questionable way to conclude that Congress should set prices for every new drug used by every beneficiary in Medicare. As Dr. Adam Fein, a well-known expert in the drug pricing policy noted, the authors equally weighted the list price of all drugs that happened to be approved in a given year instead of calculating a weighted cost based on utilization that considered factors such as the size of the population treated and number of prescriptions used in a year. The method used by the authors wildly overstates average prices, by overweighting costly new drugs that treat ultra-rare conditions.

The authors also cherry pick well-known data by mentioning that prescription drug spending in the United States exceeded half a trillion dollars in 2020. Yet the authors of the research they cite actually went to great lengths to ensure readers understood that “spending on medicines” describes money “paid to distributors by their pharmacy or hospital customers,” not money spent by patients, health insurance plans or Medicare. That caveat was completely missing in the latest research.

So what is the reality? The truth is that the majority of the increase in new pharmaceutical spending is not caused by price increases. It is the result of more people using newer drugs more frequently, and more and more of that additional spending is going to middlemen who neither discovered nor developed the drug. In 2020, more than half of spending on brand drugs went to someone other than the developer, up from one-third in 2013.

It is notable that the role of these pharmacy benefit managers in the drug pricing system is under increasing scrutiny, from the pages of The New York Times itself, to the Federal Trade Commission and on a bipartisan basis in the U.S. Senate.

It is also true that on a net basis, in 2020 prescription drug spending was $359 billion, less than 9% of total health care expenditures. Net prices for new drugs are actually growing more slowly than inflation. More broadly, good research should cite net spending, as the important difference between list and net prices used in research is well documented in research literature.

Despite what the authors of the recent research said, government price setting will lead to fewer new medicines. Economists and experts on all sides of the price control discussion have looked at this issue many times. They may disagree about the number of drugs we will not see, but they all agree that a government price control scheme will reduce the number of new medicines.

Good policies should be based on a complete understanding of the reality of drug development and how the pharmaceutical sector gets revenue and deploys spending. Earlier this year, when another researcher in JAMA discussed how profitable the pharmaceutical sector is, the nonpartisan Congressional Budget Office clarified the matter:

Some estimates of the pharmaceutical industry’s profitability reflect profits earned during a specific period, such as a year or a quarter. Such estimates often indicate that profit margins are higher for manufacturers of brand-name drugs than they are for many other firms. An annual profit estimate provides a glimpse of a drug manufacturer’s performance during a given year, but because it does not reflect the long-term opportunity costs and risks associated with R&D investment choices, it does not provide a complete assessment of the profitability of that firm’s drug development activity.

The goal of any well-intentioned policy effort should be to lower costs for patients at the pharmacy counter. For that we need good policies based on thorough research that acknowledges its limitations, not political advocacy that is funded by industry critics and disguised as science.

John M. O’Brien, PharmD, MPH is president & CEO of the National Pharmaceutical Council.