Why Are U.S. Drug Prices Immune to Government Regulation?

by wayne persky

Founder and President of the Microscopic Colitis Foundation

Prescription drugs in the U.S. cost several times as much as they do in other countries of the world. Yet unlike other industries, the drug industry continues to escape heavy-handed government regulation.

Only pharmaceutical companies in the U.S. can charge outrageous prices without fear of regulation.

The unique situation in which pharmaceutical companies in the United States can set virtually any price for their products, unlike most other manufacturers, results from a combination of regulatory, economic, and political factors. And those reasons are listed at the beginning of this article

Why are drug companies allowed to escape government regulation in the U.S.?

The issue of why drug companies in the United States appear to escape stringent regulation and are able to charge high prices for medications is multifaceted, involving a combination of legislative, regulatory, economic, and political factors, but it appears to primarily boil down to the lack of incentive among members of Congress. Apparently, the pharmaceutical companies, are able to use their skillful lobbying, campaign contributions, rebates, and other means to consistently persuade Congress to pass laws that favor their welfare, rather than the welfare of the U.S. citizens who elected those members of Congress

Pharmaceutical companies influence the judgment of lawmakers in many ways.

The pharmaceutical industry is one of the most influential sectors in American politics, and it actively participates in campaign financing to support candidates and lawmakers who are sympathetic to their interests. This financial support can take several forms:​

Direct contributions — Pharmaceutical companies often set up PACs that collect contributions from employees and distribute them to political candidates, parties, and other PACs.

Individual contributions —Executives, employees, and stakeholders within the pharmaceutical industry may also make individual contributions to political campaigns.

Lobbying expenditures — Drug companies spend significant amounts on lobbying efforts to influence legislation and policy decisions. While not direct campaign donations, these expenditures are part of the broader strategy to shape political outcomes.

Obviously, the key reasons for making contributions are:

1. Influencing legislation — Pharmaceutical companies seek to support candidates who are likely to enact or oppose legislation that affects the industry, such as drug pricing regulations, patent laws, and healthcare reform.
2. Maintaining favorable policies — Contributions are often aimed at maintaining a favorable regulatory environment, ensuring continued patent protections, and supporting policies that promote innovation and market exclusivity.
3. Gaining access — Campaign contributions help pharmaceutical companies gain access to lawmakers and policymakers, allowing them to present their case and influence decision-making processes.

Contributions have an impact on:

1. Legislative outcomes — There's evidence to suggest that campaign contributions from pharmaceutical companies can influence legislative outcomes, particularly in areas like drug pricing and patent reform.
2. Regulatory environment — Contributions can affect the regulatory environment, potentially leading to more favorable conditions for pharmaceutical companies, such as extended patent protections and limited competition from generics.
3. Public perception — The influence of pharmaceutical money in politics is often criticized by public health advocates and consumer groups, who argue that it can lead to policies that prioritize industry profits over public health.

Transparency and reporting can be found at:

• Federal election commission (FEC) — Campaign contributions from PACs, individual donors, and other entities are reported to the FEC, which makes this information publicly available. This transparency allows for scrutiny and analysis of the influence of pharmaceutical money in politics.
  
• OpenSecrets.org — Organizations like the Center for Responsive Politics track and report on campaign contributions and lobbying expenditures by the pharmaceutical industry, providing detailed insights into their political activities.

Examples of pharmaceutical company influence include:

• Medicare negotiation — The prohibition on Medicare negotiating drug prices is often cited as a result of pharmaceutical industry influence, reflecting the industry's significant lobbying and campaign contributions.
• Drug pricing legislation — Efforts to pass drug pricing reforms frequently encounter strong opposition from lawmakers who receive substantial contributions from the pharmaceutical sector.

Consider Medicare's non-negotiation clause (added in 2003).

Why would our lawmakers pass a law to add that clause to the Medicare regulations? Is there really any way that addition could lead to anything other than higher drug prices? A Politico article published about a year ago explores this issue in depth. The article, titled "The Real Reason Drugs Cost So Much — and Do Too Little" delves into the systemic issues that result in high prescription drug prices in the United States and the limited efficacy of some of these medications (Bagley, 2023, August 27).1 Here are the key points and insights from the article:​

1. In 2003, President George W. Bush signed a law adding prescription drug coverage to Medicare (Medicare Part D). However, a significant caveat was included at the behest of drug companies: Medicare was prohibited from using its market power to negotiate lower drug prices. This prohibition was controversial, with critics arguing that it removed the single most effective tool for restraining drug costs.​
2. The 2022 Inflation Reduction Act (IRA) partially lifted this prohibition, allowing Medicare to negotiate prices for certain high-cost drugs. This reform is expected to save an estimated $100 billion over the next ten years. The Centers for Medicare and Medicaid Services (CMS) will now identify and negotiate the prices of top-spending drugs annually, starting with 10 drugs and eventually expanding to 20 drugs per year.​

But the pharmaceutical industry has responded with litigation against the 2022 IRA

The pharmaceutical industry has launched multiple lawsuits against the IRA, claiming it violates the U.S. Constitution in various ways, including First Amendment and Fifth Amendment rights. Despite these claims, legal experts believe the lawsuits are unlikely to succeed because Medicare is a voluntary program with specific conditions of participation.​

Drug companies argue that reduced revenues from Medicare negotiations could hurt innovation, as drug development is costly and reliant on potential future earnings. However, the Congressional Budget Office (CBO) estimates that the impact on innovation will be modest, with only six fewer drugs coming to market over the next 20 years.

The article points out these issues with the current drug payment system.

1. The current system rewards pharmaceutical companies for bringing drugs to market and selling large quantities, regardless of the drug's efficacy. Medicare and Medicaid are required by law to cover all FDA-approved drugs, which means they must pay for drugs even if they offer marginal benefits relative to their costs.
2. Pharmaceutical companies often invest heavily in drugs that can be sold for high prices, such as cancer drugs, even if they provide limited benefits. Conversely, there is underinvestment in essential areas like new antibiotics, which are crucial for combating antimicrobial resistance but offer limited sales potential due to their restricted use.

And it recommends making the following improvements:

1. To send better signals to the market about the kind of innovation that is valued, Medicare could be given the authority to pay more for highly effective drugs and less for those with marginal efficacy. Implementing value-based payment would be complex and controversial, as it could limit access to certain therapies that some patients desire.
2. While the IRA focuses on cost savings, future reforms should aim to improve overall health outcomes by aligning drug payments with the actual value they provide to patients. By incentivizing the development of drugs that offer significant health benefits, the healthcare system can ensure better-targeted innovation and improved long-term health outcomes.

But some argue against price controls.

Prior to the 2003 addition of the nonnegotiable clause to the Medicare regulations, The Heritage Foundation published an article titled "Why Price Controls on Prescription Drugs Would Harm Seniors" (John, 1999, May 4).2 The article stated several reasons why the authors believed that price controls on prescription drugs would be detrimental. Some of the key points made in the article were:

1. The bill would force drug manufacturers to sell drugs to pharmacies at discounted rates, but there is no guarantee that these savings would be passed on to seniors. This concern highlights a potential flaw in the implementation of price controls where intermediaries (PBMs and pharmacies) might not transfer the benefits to the end consumers (seniors). To address this, policymakers would need to include mechanisms to ensure that discounts reach patients, such as direct rebates or regulations mandating pass-through savings.
2. Drug manufacturers may raise prices charged to the government to offset losses from price controls, leading to higher costs for taxpayers. This is a valid concern as price controls can lead to cost-shifting. Ensuring that drug manufacturers do not disproportionately raise prices for government programs would require stringent oversight and possibly additional regulations to prevent such cost-shifting.
3. Fixing prices at unprofitable levels could discourage suppliers, leading to reduced availability of drugs. Price controls need to be carefully calibrated to avoid making drug supply unprofitable, which could lead to shortages. Policymakers would need to balance affordability with ensuring that suppliers remain incentivized to produce and distribute drugs.
4. Limiting profits would reduce funds available for R&D, potentially slowing down the development of new drugs. R&D is indeed costly and high-risk, with a small percentage of compounds making it to market. Reducing profits could impact the funds available for R&D, but this must be weighed against the benefits of making existing drugs more affordable. Incentives for innovation, such as government grants or public-private partnerships, could be part of the solution to ensure ongoing investment in R&D.
5. Historical evidence suggests that price controls generally worsen the problems they aim to solve, leading to shortages and inefficiencies. The efficacy of price controls varies depending on how they are implemented. While some historical examples show negative outcomes, others have been successful in different contexts. Thus, it is important to consider the specific design and enforcement mechanisms of price controls.

Unethical practices, including bribing healthcare professionals and high-level government officials

add support to the call for government regulation of pharmaceutical companies. There have been instances where pharmaceutical companies have been accused and found guilty of unethical practices, including bribing healthcare professionals and other parties, but direct evidence of major drug companies bribing high-level government officials in the United States for favorable treatment is less common and often not publicly substantiated due to the complexities and legal protections around such matters. However, there have been numerous cases of illegal and unethical behavior by pharmaceutical companies that hint at systemic issues within the industry. These unethical practices include:

• Off-Label marketing and kickbacks: — In 2009, Pfizer paid $2.3 billion to settle criminal and civil allegations that it illegally promoted the off-label use of four drugs and provided kickbacks to healthcare professionals. In 2012, GlaxoSmithKline (GSK) agreed to pay $3 billion to settle allegations of promoting off-label drug use, failing to report safety data, and paying kickbacks to doctors.
• False claims and medicaid fraud — In 2013, Johnson & Johnson paid over $2.2 billion to resolve criminal and civil liability for promoting off-label uses of its drugs and paying kickbacks to physicians and the nation's largest long-term care pharmacy provider. In 2010, Novartis paid $422.5 million to settle charges that it illegally marketed drugs for off-label uses and paid kickbacks to healthcare professionals.

The legal framework governing interactions between pharmaceutical companies and government officials includes stringent anti-bribery laws, such as the Foreign Corrupt Practices Act (FCPA) and various federal and state regulations. Despite these laws, the high levels of lobbying and campaign contributions create a landscape where the line between legal influence and unethical behavior can become blurred.​

There have been several high-profile investigations and whistleblower cases that have brought to light unethical practices within the pharmaceutical industry. While these cases often focus on interactions with healthcare providers and marketing practices, they sometimes reveal broader issues within the regulatory environment.

The bottom line appears to be.

Barring some unforeseen miracle, U.S. citizens will continue to pay the highest drug prices in the world. It seems illogical that the U.S. government would regulate virtually every industry in the country except for one. But note that this one exception (the pharmaceutical/health products industry) spent over $5 billion on lobbying, far more than any other industry, between the years of 1998 and 2023 ($5,834,580,000, to be more exact) (The Investopedia Team, 2024, February 19).3 Unfortunately, this proves three things:​

1. Pharmaceutical companies are making outrageous sums of money.
2. They know where to spend it so that they can continue to make outrageous sums of money.
3. Our elected government officials can be bought.

References

1. Bagley, N. (2023, August 27). The Real Reason Drugs Cost So Much — and Do Too Little. , Retrieved from https://www.politico.com/news/magazine/2023/08/27/medicare-drug-price-value-00111346

2. John, D. (1999, May 4). Why Price Controls on Prescription Drugs Would Harm Seniors. The Heritage Foundation, Retrieved from https://www.heritage.org/government-regulation/report/why-price-controls-prescription-drugs-would-harm-seniors

3. The Investopedia Team. (2024, Fbruary 19). Which Industry Spends the Most on Lobbying? Investopedia, Retrieved from https://www.investopedia.com/investing/which-industry-spends-most-lobbying-antm-so/