Commentary: How Big Pharma raises drug costs

While the ongoing budget battle is getting the lion’s share of media attention, Congress is also soon expected to move an array of legislation to cut the cost of prescription drugs. The main challenge is to advance reforms that stymie the efforts of large pharmaceutical companies to inflate drug prices.

Congress passed the Hatch-Waxman Act in 1984, which established an approval pathway for generic drugs while increasing intellectual property protections for existing ones. Today, more than nine out of 10 prescriptions are generics, which has been good for patients and consumers. But Congress still has its work cut out for it.

Some existing, laudable bills seek to broaden the use of generics even farther. For example, Utah Republican Senator Mike Lee’s Biosimilar Red Tape Elimination Act would increase the use of lower-cost generic drugs by no longer requiring the Food and Drug Administration to declare each biosimilar “interchangeable” in order for pharmacies to substitute for them.

At the same time, the Affordable Prescriptions for Patients Act would stop brand-name companies from engaging in “patent hopping” — the process by which major drug companies, months before their drug patent expires, move patients to other patented brand-name drugs so they cannot make use of cheaper generics. These are just two of several pieces of legislation that Congress will consider before the end of this legislative session.

Congress has yet to address the elephant in the room: the fact that major drug wholesalers are working to prevent more generic drugs from coming to market.

While pharmacy benefit managers try their best to purchase prescription drugs at reasonable rates for the American people, they often remain expensive because just three companies — Amerisource Bergen, Cardinal Health, and McKesson Corp. — control 90% of drug distribution, which, according to a 2022 Commonwealth Fund study, allows them to control which generic drugs Americans may or may not have access to and how much those drugs cost.

Dr. Neeraj Sood, a senior fellow at the USC Schaeffer Center for Health Policy and Economics, told Bloomberg Law that this arrangement allows the wholesalers to “basically say, ‘Hey, we’re only going to distribute generic drugs from two companies, and the other 98 companies are shut out of the market.’”

Sood is right. As former Rep. Henry Waxman (D-Calif.) told the Washington Post years ago, this is particularly ironic since the whole idea of creating the generic drug marketplace was to reduce prices. If the prices of generic drugs are high due to rigged systems, then Congress must provide a remedy.

Nearly every attorney general in the country is already investigating the wholesalers’ purported involvement in an alleged price-fixing scheme that some state officials have called the largest price-fixing cartel in history. In separate cases, the U.S. Department of Justice has already secured a $13 million settlement from one wholesaler for allegedly paying kickbacks to its physician practice customers and more than $190 million from another for purportedly reporting inflated pricing information that caused consumers to overpay for drugs.

Congressional bills like the Biosimilar Red Tape Elimination Act, Affordable Prescriptions for Patients Act, and the Hatch-Waxman Act seek to undercut major pharmaceutical companies’ monopolistic stranglehold by increasing the use of generics. But what good will they do if these drug wholesalers can continue raising the cost of those drugs?

It’s encouraging that the Justice Department, state attorneys general, and other law enforcement agencies are working to fend off these marketplace abuses. But no one can help more than Congress.

Congressional leadership has already pledged to address the prescription drug affordability crisis this fall. The drug wholesalers will be a major part of any legislative discussions. They are the root of this problem — and it’s long past time for our elected representatives to pull those weeds.

Tim Benson (tbenson@heartland.org) is a senior policy analyst with the Heartland Institute.