Drug prices are skyrocketing in the US, and eye-watering Big Pharma profits are rising right along with them. With millions of Americans skipping medicine doses due to cost, widespread public frustration has spurred lawmakers to propose some good ideas for addressing the crisis. Lifting the ban on Medicare negotiating the price it pays for drugs and allowing prescription drugs to be imported from other countries would be helpful. So would the US government overriding patents and licensing generic manufacture of drugs that were discovered with taxpayer funding.
Another popular idea, featured in pending Congressional legislation and more than a dozen state proposals, is forcing pharma corporations to open up their black box on drug pricing and research costs. At first glance, so-called transparency legislation, which is already the law in Vermont and has passed the Maryland legislature, can seem a bit tame. After all, what difference will it really make, as long as companies remain free to hike up their prices, with the limited requirement that they disclose and explain the increases?
There is a reason why Big Pharma fiercely resists transparency proposals. They represent a logical first step toward a reform of the US prescription medicines landscape that would be both meaningful and embraced by an angry public: treating the pharmaceutical industry as a public utility, with their business practices and prices closely regulated by the government.
If pharmaceuticals were a public utility, they would be subject to the same kind of price review and approval process for prescription drugs that already exists throughout the country for goods like electricity, water and gas. Treating pharma as a utility already has the support of some US physicians and public health experts. Last fall, the National Academy for State Health Policy issued a “Call to Action” on drug prices, urging states to use their legal power to regulate the industry. “Prescription drugs are an essential good; they are as necessary to quality of life — and life itself — as water and sanitation,” the National Academy insisted.
There are three core reasons this proposal makes sense.
First of all, the pharmaceutical industry is already government subsidized. Contrary to its free market rhetoric, the pharmaceutical industry’s business model is completely dependent on government subsidies and protections. Corporations depend on early-stage research funded by the National Institutes of Health and other government agencies, rely on bulk government purchases of their products, and collect prices that are artificially inflated by government-granted monopoly patents and protectionist trade agreements.
Moreover, patients and families rarely enjoy any of the choices that a free market might provide. Instead, they are forced to pay pharma’s named price for monopoly products that often mean the difference between life and death. Of course, the industry argues loudly against price controls. But Big Pharma is so profoundly dependent on government largesse that it would have no choice but to ultimately acquiesce to tighter regulation.
Secondly, utility regulation is as American as apple pie. The tradition of US political and cultural resistance to government regulation of private industry does not extend to the idea of public utilities. Every state already has a public utility commission that sets rates on some essential goods, even when those goods are provided by private for-profit companies. University of Michigan law professor Nicholas Bagley has written a comprehensive account of the long US history of utility regulation, which has often spread far beyond so-called natural monopolies (such as tap water and electricity) to prevent consumer exploitation in transportation, food and the financial sector. “Public utility regulation was developed precisely to address the concerns with supply, access, discrimination, and unfair pricing that have begun to plague the modern medical industry,” Bagley writes.
Finally, utility regulation is a proven success at controlling medicine prices. Regulation of medicine pricing may be a new concept to most Americans, but it is the norm for many other high-income countries. It is the chief reason why patients in countries like Canada, Australia and the UK pay half as much or less for their medicines compared to US patients. In those countries, the governments establish a formulary of valuable medicines and acceptable prices. Pharma companies still make a nice profit off of those prices, just not as much as the windfall they reap in the unregulated US. The US Veterans Administration uses a similar formulary approach in its medicines purchases, and as a result pays 40 percent less for drugs than negotiation-barred Medicare does.
The pharma industry responds to this disparity by claiming that its high prices in the US are necessary to support research that benefits the global community. But that argument has been thoroughly debunked. A recent study conducted by physicians at Memorial Sloan Kettering Cancer Center showed that US price gouging enabled by our “anything goes” regulatory approach yields far more profits than the industry spends on R&D. And that calculation even gives the industry credit for the huge amount of its research aimed at duplicating existing medicines in pursuit of high-profit products, many of which are better at making money than improving health. In fact, the most impactful medicines research traces its roots to government funding.
Treating the pharmaceutical industry as a public utility is not a cure-all for the problem of medicine access in the US, much less globally. Long term, a better solution is redirecting the billions of dollars in existing public funding of medicines into a system that bypasses the many private sector inefficiencies altogether. And, of course, medicines are just one component of the overpriced, underperforming US health care system that desperately needs to be addressed by reform, such as a single-payer health care program. But treating medicines as a public utility would be a powerful first step toward a more ambitious fix.