The cost of prescription medicine is a constant strain for many Americans. While new federal legislation may soon lend relief, some investors worry that profitability will pay the price.
Attached to the new US Inflation Reduction Act is a multipronged mandate on pharmaceutical companies to limit or lower drug prices—particularly for insulin and blood thinners, among the country’s most-prescribed drugs. As expected, price controls raise investor concerns that companies will have less incentive to develop new life-saving treatments—a costly, time-consuming process.
Based on our assessment, however, prescription drug development could accelerate, not decline, driven by new technologies and better cost efficiencies within drugmaker pipelines.
Lower Drug Prices Can Be a Game Changer
Improving the affordability of essential medicines, which can be cost-prohibitive for many Americans, offers real financial relief. About two-thirds of personal bankruptcies in the US are linked to soaring medical expenses. And millions who can’t afford their prescribed medication endanger themselves by self-rationing or forgoing it.
On the other hand, drugs remain more cost-efficient than physician or hospital services, based on their prices as a percentage of all US healthcare spending. The pharmaceutical industry still delivers relative value, but it can always do better, and we think the new law will help.
For instance, the act’s key beneficiary will be Medicare, the largest single purchaser of prescription drugs. The law gives Medicare the authority to negotiate prices and secure rebates for high-cost treatments, which could save billions. About $111 billion is spent annually on prescriptions in the Medicare Part D drug benefit alone, according to the Congressional Budget Office (CBO).
Beyond its negotiating powers, the new law eventually will cap out-of-pocket Medicare patients’ prescription costs to $2,000 annually and limit insulin costs to $35 per month (Display). It will also extend drug-related subsidies for Affordable Care Act insureds, whose numbers have spiked since the COVID-19 economic crisis.