“Right now, when Americans overpay for prescription drugs, too many pharmaceutical companies don’t use the profit nearly enough to innovate or research. Too many companies use it on buying back their stock, inflate their worth, drive up CEO’s salaries and compensation, and find ways to box out the competition.”
Americans often complain about the cost of prescription drugs, and politicians have responded with plans to put pressure on drug manufacturers. In a speech that outlined his push to have the government directly negotiate the price of some drugs available through Medicare, President Biden made a number of claims about the pharmaceutical industry, some which are lacking context. Here’s a guide to some of the president’s statements. (We had previously examined a misleading pharmaceutical industry ad knocking proposed legislation in Congress.)
It’s worth noting that although the overall cost of drugs spiked in the mid-2010s, price increases have moderated in recent years. According to the Congressional Research Service, prescription drug spending is forecast to remain at about 9 percent of national health-care spending through 2028, down slightly from a previous average of about 10 percent of health-care spending. The key problem, according to one 2020 study, is that certain specialty drugs, which can cost tens of thousands of dollars, are a small percentage of total prescriptions but can account for almost 40 percent of retail and mail-order prescription drug spending.
“We pay the highest prescription drug costs of any developed nation in the world. Let me say that again: of any developed nation in the world. About two to three times what other countries pay.”
Biden appears to be referring to a 2021 Rand Corp. study that compared U.S. prices for drugs with 32 other countries and concluded that U.S. prices were 256 percent of those in other countries. But it’s difficult to make such comparisons because the pricing mechanisms work differently, as the study acknowledged.
In the United States, pharmaceutical companies negotiate rebates and discounts with pharmacies, health plans and the U.S. government. Rand did not have access to those numbers, so it relied on the much higher “invoice” price.
“Although prices net of rebates and other discounts paid by manufacturers after drugs are dispensed are particularly relevant in the United States, these prices are generally not available to researchers,” the study said.
Rand came up with an average rebate to address this issue, which reduced the disparity between the United States and other countries somewhat, but the rebates could be substantially higher for some drugs. “Although we applied an estimated adjustment to U.S. prices to approximate rebates and other discounts applied to manufacturer prices as one of our sensitivity analyses, we recognize that the resulting prices will almost certainly differ from the actual net prices to payers for individual presentations,” Rand said.
The pharmaceutical industry argues that Americans get access to new drugs faster because prices have not been lowered by government fiat. There’s no easy way to put a price tag on that, so that is another limitation of such international comparisons. “Other studies noted the relatively quicker approval and uptake of newer, typically more-expensive drugs and presentations in the United States compared with other countries,” Rand acknowledged. “Our study does not address the trade-offs between higher prices and earlier access to new drugs.”
“During our conversation, she pulled out a vial of insulin from her bag. In 2001, she said, that single vial cost $32 a bottle. Today, that exact same bottle, with the same exact formula — no changes — costs $280 per bottle.”
Biden relies on an anecdote here, from a woman named Gail in Denver, but the price increase appears higher than the increases documented in the industry. Still, it’s an important issue. A 2018 study estimates that care for people with diabetes accounts for 1 in 4 health-care dollars in the United States. New insulin products are often big contributors to higher prices, but note that Biden said Gail was relying on the “same exact formula” over 20 years.
A recent investigation by the Senate Finance Committee found that manufacturers have high list prices but then compete by offering large rebates to pharmacy benefit managers (PBMs) — companies that manage prescription drug benefits on behalf of health insurance companies — so the net price may actually decrease.
“Insulin manufacturers compete fiercely, using rebates as bargaining chips to receive preferred formulary placement for their products and to block competition. The companies undertake these bidding wars to maximize revenue and capture — or maintain — market share,” the Senate Finance Committee report said. “PBMs appeared to be complicit in this behavior. There appeared to be little, if any, attempt by PBMs to discourage manufacturers from increasing the list price of their products. Instead, the Committee found that PBMs used their size and aggressive negotiating tactics, such as the threat of excluding drugs from formularies, to extract more generous rebates, discounts, and fees from insulin manufacturers.”
“Right now, when a drug company seeks permission from the FDA — the Food and Drug Administration — for a certain drug to get a patent, it’s allowed — the patent — it’s allowed to exclusively sell that drug without competition for up to 12 years.”
Biden’s point here is a bit garbled. A patent lasts 20 years, but it can take many years before a drug is formally approved by the Food and Drug Administration, eating up years of that twenty-year period. Once the drug is approved, there is an exclusivity period that can, in certain circumstances, add up to 12 years.
But that does not mean the drug does not have competition. Most new medicines still face competition from similar drugs made by other companies or even generics, helping to push prices down even during that exclusivity period, according to the Pharmaceutical Research and Manufacturers of America (PhRMA).
Avalere, a health-consulting firm, found that in 2019, less than 1 percent of Medicare Part D prescription drug spending was spent on a single-brand drug that was the only product in its therapeutic class. Another 8 percent was spent on single-brand drugs that faced competition from another brand drug. “While single-source brand drugs accounted for a significant share of 2019 Part D spending, the vast majority of single-source brand drug spending was in USP classes that included other generic or brand drugs,” Avalere says.
“According to one study, from 2016 to 2020, pharmaceutical companies spent $577 billion in stock buybacks and dividends — $56 billion more than what they spent on all research and development over that same period of time.”
Biden is referring, accurately, to a House Oversight Committee report that examined the research and development spending of 14 drug companies between 2016 and 2020.
But note that the figures include dividends. Many established publicly traded companies pay dividends to shareholders, and there’s nothing wrong about that. Stock buybacks are a more questionable practice because that is leftover cash that could perhaps be invested on something else rather than bolstering the share prices. (Fewer shares generally means higher stock prices.)
When you remove the dividends from the calculations, the report shows that the drug companies spent $522 billion on research and development, far more than the $219 billion spent on stock buybacks.
A common way to measure a company’s investment in research and development is as a percentage of revenue. The health-care industry routinely is at or near the top of industries that invest in research and development, with drug companies frequently leading the way. Among the companies in the Standard & Poor’s 100, “the top three companies on the list are all pharmaceutical companies, Celgene, Bristol-Myers Squibb, and Merck & Co, spending 45 percent, 31 percent and 25 percent of revenue on R & D, respectively, and each of them significantly above the sector average of 16 percent,” according to an analysis by Craft, a financial intelligence firm.
Send us facts to check by filling out this form
Sign up for The Fact Checker weekly newsletter
The Fact Checker is a verified signatory to the International Fact-Checking Network code of principles