There are few issues that bring the American people together more than the idea that the cost of prescription drugs is too high.
Polling shows that large majorities of Americans in both parties think the government needs to do more to lower the cost of prescription drugs, and every presidential administration this century, Republican and Democrat, has made the issue at least a rhetorical priority. Yet the cost of pharmaceuticals continue to outpace inflation , costing the U.S. government and average citizens alike.
Like his predecessors, President Joe Biden campaigned on lowering the cost of prescription drugs. He touched on the topic again Friday, when he issued an executive order directing the Food and Drug Administration to work with states to import lower-cost drugs from Canada, and told the Federal Trade Commission to ban industry schemes that delay the development of cheaper generic drugs.
Experts say, however, that despite the lip service paid to this issue by presidents and many lawmakers, there likely remain too many stout defenders of pharmaceutical companies /zigman2/quotes/202053893/composite PPH -0.66% in Congress to enact reforms that will meaningfully reduce revenues for the industry overall.
“The desire among Democrats to address drug pricing remains strong,” Spencer Perlman, director of health care research at Veda Partners, told MarketWatch. “Their biggest problem is there is no agreement between moderates and progressives in terms of what they actually want to do, so they don’t have the votes to pass anything at this point.”
Democrats are working on budget reconciliation bill , which can be passed with only Democratic votes in the Senate, that includes much of Biden’s economic and social priorities that won’t be included in a bipartisan infrastructure bill that is also being negotiated in Congress.
The most expansive version of the Democrats-only bill includes major health-care reforms, including provisions that enable the government to directly negotiate the price that Medicare pays for prescription drugs and also extends those price savings to Americans not covered by Medicare.
The Congressional Budget Office estimated that the policy would save the federal government just under half a trillion dollars over a ten year period in payments to pharmaceutical companies. Extending those cost savings to all Americans would likely hit industry profits even more.
But while most or all Democrats can agree that the federal government and individual Americans are paying too much for prescription drugs, the devil is in the details. Perlman said that simply stating that you’re for price negotiation is a platitude without declaring which drugs should be implicated, how a fair price should be determined, what a back-up price should be in the case of a failed negotiation and how you compel manufacturers to participate in a negotiation.
The answers to these questions will determine whether the bill could raise upwards of half a trillion or merely tens of billions of dollars, he said, adding that opposition from Democrats could come from more conservative members who believe in more limited government to those whose states and districts are home to a disproportionate number of drug-industry jobs.
Sen. Robert Menendez of New Jersey, whose state is home to many big-name pharmaceutical manufacturers including Merck & Co. /zigman2/quotes/209956077/composite MRK -0.40% and Johnson & Johnson /zigman2/quotes/201724570/composite JNJ -0.28% , has objected to using the industry as a “piggy bank” to fund other priorities.
“We keep taking money from the pharmaceutical industry and then we never see the reduction in the cost of prescription drugs. How is that solving the problem?” Menendez, a Democrat, told Politico in June .
Given that Democrats hold razor-thin margins in both the House and Senate, individual lawmakers who have concerns about what these reforms might do to the industry that employs hundreds of thousands of Americans, and which has proven its worth during the COVID-19 pandemic, there’s reason to believe these negotiations could break down altogether.
“They need unanimity, and they’re just not there,” Perlman said. “I would estimate up to 10 moderate Senate Democrats have a lot of concerns about a lot of policies progressives want to go forward with.”
That said, the revenue-raising nature of these reforms will make it an enticing policy idea, given that Democrats are desperate for revenue-raisers as they seek to expand the social safety net. “It’s a policy goal in itself and it is conveniently a rather large source of revenue to spend on very popular policy goals like adding hearing, vision and dental coverage to Medicare,” Brandon Barford, a partner at Beacon Policy Advisors, told MarketWatch.
Barford argued that the market is likely underestimating the chances that any drug-price reform passes Congress whatsoever, though he says that the final product will likely raise something closer to $100 billion than the upwards of $500 billion some in Congress are hoping for.
For investors in the health care sector broadly and pharmaceutical stocks in particular, the end result would likely be some headline risk that doesn’t fundamentally alter its long run potential, according to Jason Butler, managing director of biotechnology equity research at JMP Securities.
“We should expect that the government’s going to put itself in a better position to negotiate, and that will lead to lower price increases for the pharmaceutical industry,” he told MarketWatch. “But is it really going to matter? I think the most likely scenario is only going to have incremental impact on drug pricing in the U.S.”