Drug prices contribute relatively little to overall healthcare cost growth, and aren’t driven by manufacturers or monopolies

Pricing Realities The populists tell us that prices are rising way too fast because of “corporate greed.” The Kaiser Family Foundation rails that “Prices Increased Faster Than Inflation for Half of all Drugs Covered by Medicare in 2020.”23 But of course that means that prices increased less than inflation for the other half. Three professors of medicine at Harvard agree, claiming that drug prices are “skyrocketing.”24 To be sure, there are cases where individuals confront large and sudden medical bills: One study found that nearly 40 percent of commercially insured individuals incurred half of their annual out-of-pocket drug spending on one purchase, and 26 percent incurred 90 percent of their annual healthcare spending in only one or two encounters.25 (This is why policies such as “smoothing” Medicare beneficiaries’ out-of-pocket costs over the course of a year are often warranted.)26 Yet overall, the data shows that American consumers’ out-of-pocket expenditures on drugs over the past two decades have grown much less than their overall healthcare and health insurance expenditures. Furthermore, the distinction between net prices and list prices is critical because while list prices may be on the rise, the share of expenditures being paid to drug manufacturers in recent years is lower than before. For instance, Andrew Brownlee at the Berkeley Research Group found that the share of revenues accruing to drug manufacturers for all drugs decreased by over 17 percentage points from 2013 to 2020, from 66.8 percent to 49.5 percent, while the share going to intermediaries (wholesalers, pharmacies, Pharmacy Benefit Managers (PBMs), and insurance companies) increased from 33.2 to 50.5 percent.27 In other words, less than half of every dollar Americans spend on drugs actually goes to the companies developing and making them. Overall, Brownlee found that brand manufacturers retain just 37 percent of total spending on all prescription medicines.28 Similarly, researchers at the University of Southern California examined the “net price” of insulin and found that list prices did increase between 2014 and 2018, but that the share of insulin drug sales flowing to manufacturers decreased, with more than half of insulin expenditures going to intermediaries by 2018.29 Indeed, there has been a 140 percent increase in insulin list prices over the past eight years, but net prices actually declined by 41 percent, casting a new light on Angelis and colleagues’ argument that “old and common drugs” like insulin “have seen inexplicable price increases.”30 Meanwhile, the Biden administration has used the assertion that America’s biopharmaceutical industry is excessively concentrated to justify policies such as expanding Bayh-Dole Act march-in rights to control the price of resulting products. For instance, the administration palpitates that America’s 25 largest pharmaceutical companies command around 70 percent of industry revenues. Yet that is hardly evidence of an overconcentrated market. To see one that truly is, just look at the pharmacy benefit managers (PBM) market, where just four companies—Express Scripts, OptumRx, Prime Therapeutics, and Kaiser Pharmacy—commanded 68 percent of the revenue in 2021. That’s a concentrated market; America’s pharmaceutical sector is not. Thus, as noted, America’s PBM market is both substantially more concentrated and profitable than America’s pharmaceutical sector, yet it’s investing a scant fraction of its revenues back into R&D, let alone creating innovative products that substantially benefit quality and longevity of life.