When discussing pharmaceutical costs in the United States, it’s vital to recognize that the wealth amassed by Big Pharma has come not from benevolence, but through capitalizing on financial strategies that elevate profits over innovation. This article uncovers the intricacies of how the pharmaceutical industry operates, particularly in relation to its overwhelming lobbying power that has stymied meaningful reforms aimed at reducing drug prices.
By Lynn Parramore, Senior Research Analyst, Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
In the realm of exorbitant prescription drug prices in America, one fact stands clear: Big Pharma has amassed its wealth through high-stakes financial maneuvers rather than altruistic practices.
Economist William Lazonick has long argued that the financialized business model employed by pharmaceutical companies doesn’t merely inflate drug prices but also stifles genuine innovation in medical treatment.
Lazonick attributes this issue primarily to a pervasive obsession with “maximizing shareholder value.” Rather than funneling investments into groundbreaking drug development, these companies often redirect billions toward buying back stock, aiming solely to inflate share prices, enriching executives and investors alike.
In fact, many pharmaceutical firms don’t even innovate new drugs; they acquire rights to treatments originally financed by taxpayers. Researcher Fred Ledley has highlighted this, making a clear statement: you foot the bill, and they reap the profits.
Amid this chaos, patients contend with a perplexing labyrinth of intermediaries, dubious agreements, and political spin, grappling with the uncertain benefits of ambitious plans like TrumpRx or Biden’s Inflation Reduction Act (IRA).
Yet, the pressing question remains: will any of these initiatives genuinely reform the flawed structure of the pharmaceutical business?
Lazonick and economist Öner Tulum have delved deeply into understanding the industry through their extensive research. They have authored an upcoming study dissecting Big Pharma’s profit-focused model, providing insight into the behind-the-scenes tactics of these corporations and their interactions with Washington.
Let’s explore the details.
Two Approaches to Tackling High Drug Prices?
Tulum identifies two primary strategies currently employed by the U.S. government to combat high prescription costs. The first leverages international pricing comparisons, while the second seeks to negotiate prices directly. Each approach faces its own set of hurdles.
The Trump administration’s strategy aims to reduce costs by aligning U.S. drug prices with those from other nations and shifting sales directly to consumers, bypassing intermediaries. In contrast, Biden’s IRA represents a significant change by granting the government authority to negotiate prices with drug manufacturers for the first time.
According to Tulum, this shift is vital, as a clause in a 2003 Medicare law had previously blocked government negotiation for drug prices under Medicare Part D, ostensibly to prevent price regulation. This “non-interference clause” effectively hampered the government and handed negotiating power to Pharmacy Benefit Managers (PBMs), leading to inflated prices and substantial profits for these middlemen.
Critically, the clause, marketed as a pro-market victory, paved the way for the pharmaceutical industry to reap windfalls while obstructing efforts to lower drug costs.
However, the IRA changes the game by allowing the government to negotiate prices for a select group of high-cost Medicare drugs, establishing a Maximum Fair Price (MFP) and taking direct aim at soaring drug expenses.
Affected medications include prominent treatments for diabetes, blood clots, heart failure, and autoimmune diseases, with the first list to take effect in 2026. A second batch of drugs, featuring high-cost options like Ozempic and Wegovy, will follow in 2027. Yet, it’s crucial to note that actual price reductions won’t be realized until later.
Meanwhile, Trump’s plan proposes a market-friendly strategy with caveats. The TrumpRx initiative, combined with the Most Favored Nation (MFN) pricing rule, still involves government influence in pricing matters, which complicates its framing as a pure free-market solution.
The nuance lies in the details. The MFN provision hinges on drug manufacturers voluntarily agreeing to discounts; however, this “voluntary” aspect often leads to pharmaceutical companies leveraging the government’s buying power amid threats of tariffs and restricted market access to pressure compliance.
Furthermore, Tulum draws parallels between TrumpRx and the 2010 Affordable Care Act (ACA), noting how both rely heavily on market dynamics to deliver cost reductions. While the ACA’s rollout faced criticisms for its inefficiencies, reliance on competition didn’t yield the anticipated benefits, often leading to rising premiums and healthcare costs.
Tulum warns that TrumpRx may follow a similar trajectory of lofty promises and disappointing outcomes, given that the complexities of implementation and regulation could hinder its effectiveness.
A significant roadblock to the MFN pricing strategy is the lack of transparency regarding global drug prices, as foreign governments engage in secretive rebate agreements. This opacity allows pharmaceutical companies to maintain inflated U.S. prices, with the potential to manipulate average foreign prices to protect their interests.
Additionally, there remains legal uncertainty surrounding these pricing strategies, raising the potential for litigation over claims of price controls infringing upon intellectual property rights.
Tulum emphasizes that the groundwork for price control must negotiate a convoluted regulatory landscape, reinforcing the state-regulated supply chain difficulties already present before any new regulations even take effect.
With a limited number of drugs featured in TrumpRx, Tulum expresses skepticism regarding significant reductions in U.S. drug spending. The uncertainty surrounding which medications will be included means that critical, high-cost treatments for serious conditions may remain unaffordable.
The landscape is further complicated by the existence of stringent rules granting pharmaceutical companies extended periods before the government can act to negotiate lower prices for certain biologics compared to regular drugs, leading to potential delays in innovation.
What Can Be Done?
A glint of hope arises with Tulum’s observation that the Veterans Affairs (VA) system already employs effective negotiation strategies, securing discounted prices without reliance on opaque foreign pricing. A law from 1992 empowers the VA to negotiate pricing directly, guaranteeing substantial savings and providing a compelling model for broader application.
To extend this purchasing power to all Americans, Congress would need to legislate comprehensive negotiating authority for Medicare and potentially other governmental programs. However, entrenched pharmaceutical industry lobbying and political divisions have hindered progress.
Entrepreneur Mark Cuban is attempting to disrupt the status quo by introducing a platform for selling drugs directly to consumers at clear, low markups—offering an alternative to traditional models filled with intermediaries and hidden fees. Nevertheless, this approach currently assists only those who can access his platform.
Ultimately, it’s essential to address the inherent conflicts within Big Pharma’s Wall Street model and the vast information gaps that leave consumers unable to make informed decisions about drug prices.
Tulum highlights the power dynamics at play: “Big Pharma, intrinsically focused on maximizing shareholder wealth, will likely respond aggressively to any policies that threaten their profits.”
In conclusion, reforming the pharmaceutical industry is an uphill battle against the entrenched interests of Big Pharma. Whether through the IRA, TrumpRx, or MFN pricing, any proposal that threatens their profits will encounter fierce resistance. The existing system favors profitability over accessibility, and without addressing this fundamental issue, we cannot expect significant changes. Advocating for comprehensive legislative reforms is vital for ensuring affordable medication for everyone.
