Senate misfires with prescription drug bill

Cost increases more driven by rising utilization than prices

ON THURSDAY, the Massachusetts Senate passed another ill-considered piece of legislation, Senate Bill 2651, that would impose price controls on one of Massachusetts most important economic sectors, biopharmaceuticals.

The bill is ill-considered because its authors assume, as they say in their press release, that the legislation is necessary because of “rapidly rising prescription drug costs.” This assumption is false. Drug costs and drug prices are not “rising rapidly,” just the opposite. The latest data from the federal Centers for Medicare & Medicaid Services indicate that overall US health care expenditures are indeed rising rapidly, by 9.7 percent from 2019 to 2020. However, prices for brand name drugs have been dropping for four straight years. For some of the largest drug manufacturers, one analysis documented price declines of 3.1 percent, the fourth straight year of declining prices. Other similar analyses have pointed to similar declines of 2.9 percent in 2020.

Average prices do not, of course, determine how much health plans must spend on drugs. Utilization rates – how many drugs are people taking – also determine overall drug costs. Cigna, which is the second largest pharmacy benefit manager in the US, recently reported its overall drug cost data for the health plans that it serves. Cigna reported that three-quarters of the increase in drug costs for its plans was due to greater utilization, not rising prices, and that drug costs rose 4 percent overall. However, when rebate revenue from drug makers was included in the analysis, drug costs rose less than 1 percent (0.9 percent).

Massachusetts senators seem to be disregarding these national figures and moving forward with price controls because of data from the Center for Health Care Information and Analysis, a state agency, which claims that spending in Massachusetts on biopharmaceuticals rose 3 percent between 2018 and 2019. A closer look at that data raises doubts about it. First of all, the center’s 2021 report argues that the 3 percent rise is due to a spending increase from $8.1 billion in 2018 to $8.3 billion in 2019. Is $8.1 billion to $8.3 billion a 3 percent rise? According to my calculator, a rise from $8.1 billion to $8.3 billion actually represents a rise of 2.4 percent, a figure that happens to be identical to the overall inflation rate for 2018.

The drug pricing data in the center’s 2021 report has other infirmities. For example, CHIA’s analysis seems to undervalue the level of rebates provided by the industry which reduce drug costs. According to the Technical Appendix in the center’s report, they calculated the level of rebates by “collecting data from health plans.” The problem with this approach is that pharmacy benefit managers (PBMs), acting on behalf of health plans, skim a certain percentage of rebates and keep the money for themselves, never passing the full amount to health plans. If you are only relying on rebate information from health plans, you are undercounting the amount of rebates and inflating drug costs. While no one knows what percentage of rebates are kept by PBMs, one of the largest PBMs at the time, Medco, filed a 10-K report with the Securities and Exchange Commission in 2011 indicating that they kept 12.2 percent of rebates. The center’s analysis therefore may be undercounting rebate payments by double digits and incorrectly inflating drug costs.

So, are Massachusetts’ senators simply obtuse and unaware that drug prices and costs are not “rapidly rising?” Maybe some are, but one should expect that these politicians have embraced drug price controls not because they have taken a careful look at the data, but because they are hearing from their constituents who are upset about their bills at the pharmacy counter. And these constituents are correct: While drug prices are falling, consumers are paying more and more out of their pockets in the form of coinsurance, copayments, and other charges. New data from the Centers for Medicare & Medicaid Services indicate, for example, that in 2020 while overall spending on hospital care was $922 billion higher than spending on prescription drugs, out-of-pocket spending on prescription drugs by consumers was $14 billion higher than out-of-pocket spending for hospital care.

Meet the Author

William Smith

Visiting Fellow, Pioneer Institute
Despite declining drug prices, and modest growth in drug costs, health plans, including Medicare, are socking consumers with higher and higher out-of-pocket costs. If you have a 20 percent coinsurance requirement from your health plan, and you are prescribed a $50,000 oncology drug, you will be asked to shell out $10,000 from your own wallet. While the Senate legislation does cap out-of-pocket costs for insulin, a worthy proposal, thousands of other patients must take drugs for cancer, for autoimmune diseases, for arthritis, and for other conditions that require costly infused or injected specialty drugs. Where is the out-of-pocket relief for them? The Massachusetts Senate has their legislative eyes cast in the wrong place.

William Smith is senior fellow and director of the Life Sciences Initiative at Pioneer Institute.