In last month’s State of the Union address to Congress, President Biden celebrated the Inflation Reduction Act’s (IRA) potential to reduce the prices that Americans who use public health insurance (Medicare and Medicaid) pay for drugs. Without providing details, he also proposed extending the $35 insulin co-pay cap to private insurance.
This can’t be realized without Congress, which came close to including such a measure in the IRA. Meanwhile, Sen. Josh Hawley (R-Mo.) one-upped the president with a proposed cap of $25. And perhaps in response to the bully pulpit, Eli Lilly just announced that it will cap the monthly out-of-pocket price for its insulin at $35.
There may be more details in the president’s budget, expected to be released this month. It’s also worth noting that several states already have out-of-pocket caps for insulin. This wide-ranging drive to cap drug prices is often premised on the idea that Americans pay higher prices for the same drugs than their counterparts in other wealthy nations.
But artificial price caps are not a real fix. Congress should focus instead on getting wealthier countries to pay their fair share for American drugs.
A blunt instrument to control prices might sound appealing given the number of people who rely on insulin to survive. And it’s true that other countries pay significantly less for the same drugs. The reason other governments can extract such concessions from U.S. drug makers is that they are single buyers purchasing in bulk, which creates a motivation to negotiate with them.
The unfortunate truth is that drug makers make most of their profits from Americans, which means we subsidize the health care of other countries, very much like we do with global security. According to some estimates, the United States contributes between 64 percent and 78 percent of the profits of pharmaceutical companies. If pharmaceutical companies were to raise prices in Europe and other rich countries by even 20 percent, the share of profits from those nations would increase significantly and very likely lower prices for Americans.
Congress should consider tools to compel other rich nations to pay reasonable prices for American-made drugs. This is not a new idea. The Trump administration in its waning days hurriedly promulgated rules that, among other things, sought to use international reference pricing for a subset of drugs purchased through Medicare Part B (physician-administered drugs). But those rules did not survive judicial review or the new administration’s priorities.
It’s time to revisit the issue of fairness. With Medicare and Medicaid being the largest payers for drugs in the United States, various administrations have used participation in the program as a carrot to extract pricing concessions.
So how can the United States ensure other wealthy countries pay more for their drugs? More to the point, how can Americans reduce their indirect subsidy of wealthy Europeans?
There are no easy answers. Most-favored nation trade rules have the potential to allow drug makers to seek higher prices in Europe, but this is only speculative. Another way to ensure other nations pay fair prices would be through trade agreements. The United States missed this opportunity when we pulled out of the Trans-Pacific Partnership. But such conditions could be included in new trade agreements and in the review of existing ones. For example, the United Kingdom, one of the nations that drives the hardest bargains with U.S. drug makers, is eagerly waiting to enter into a bilateral trade agreement. The United States likely has the leverage to include such clauses.
Drug makers typically structure their product launches to maximize revenue and to navigate regulatory constraints. They also consider the size of the market and the willingness of each customer to pay. With years of data, they know how much Europeans and other rich nations are willing to pay for their drugs. In the end, Americans will benefit if other countries pay their fair share for pharmaceutical drug innovation.
Kofi Ampaabeng is a health economist, senior research fellow and data scientist with the Mercatus Center at George Mason University.