The following originally appeared on The Upshot (copyright 2016, The New York Times Company). It also appeared on page A3 of the January 19, 2016 print edition.
Both Bernie Sanders and Hillary Clinton are pushing for lower prescription drug prices as part of their campaigns. Debates about whether and how to reduce drug prices aren’t new. But they rarely lead to legislative success.
Still, the mere threat of government price controls may have a moderating effect on drug prices. There’s strong evidence it did so as the ill-fated Clinton administration health plan was being developed in the early 1990s. Today, with the high price of drugs and proposals to address them so prominent in the news, there are early signs it may do so again.
Sara Fisher Ellison, an M.I.T. economist, and Catherine Wolfram, an economist at the University of California, Berkeley, found evidence that pharmaceutical companies reduce growth in drug prices in response to political pressure. In the 1980s and early 1990s, drug prices grew at three times the rate of inflation. But, according to their study, rates of price growth fell to almost precisely the inflation rate by 1993, just as the Clinton health reform plan took shape.
As they are today, drug prices were a significant concern in the first few years of the 1990s and drew the attention of Congress. In 1990, under pressure from members of Congress, SmithKlein Beecham cut the price of Dyazide — a fluid retention and hypertension drug — by 11 percent. In 1991, as Congress considered several price control measures, Merck and Pfizer endorsed voluntary reductions in drug price growth to improve the industry’s reputation. In 1990, Merck, Bristol-Myers Squibb, Burroughs Wellcome, but not other big drug companies, favored increasing discounts for drugs sold to Medicaid programs.
The 1993 Clinton health reform plan included a proposal that would have used Medicare’s buying clout to moderate prices. Under the plan, Medicare would have added a prescription drug benefit — something it didn’t do until 2006 — and directly negotiated drug discounts program-wide — something it has never done. (Under the Medicare drug benefit that began in 2006 and continues today, drug prices are negotiated between manufacturers and private plans, or pharmacy benefits management companies on their behalf.)
The prospect of Medicare price controls on drugs got the attention of pharmaceutical companies and their investors. Between January 1992 and October 1993, as Hillary Clinton’s “Health Care Task Force” was considering drug price regulations, pharmaceutical stock prices fell as much as 50 percent.
Ms. Ellison and Ms. Wolfram examined over 100 of the largest revenue-generating brand-name drugs from manufacturers receiving the greatest price scrutiny. They found that large, brand-name drug firms tended to keep drug price growth close to that of overall inflation during this period of political examination. This tendency was stronger for firms likely to be more politically sensitive — those with more sales to Medicare-aged consumers and those less likely to face price-reducing competition because of longer lives left on patents.
