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Big Pharma's Showdown With Congress Over Drug Pricing: What It Really Means for You

By Keith Speights – Updated Apr 14, 2019 at 9:29AM

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A Senate committee roasted top executives of the biggest drugmakers. But will anything change for ordinary Americans?

There were some fireworks in Washington, D.C., on Tuesday. And they went off in the Dirksen Senate Office Building.

Seven executives of big pharma faced a grilling from members of the U.S. Senate Committee on Finance, as it looked into how to lower drug prices in the United States. CEOs from AbbVie (ABBV 3.06%), AstraZeneca (AZN 1.29%), Bristol-Myers Squibb (BMY -0.79%), Merck (MRK 1.66%), Pfizer (PFE 0.87%), and Sanofi (SNY 3.08%), along with an executive vice president from Johnson & Johnson (JNJ), responded to the committee's sometimes heated questions.

But does big pharma's showdown with Congress really impact ordinary Americans? Yes and no.

Colored pills on top of $100 bills

Image source: Getty Images.

All smoke and no fire?

Ranking minority member Sen. Ron Wyden, D.-Ore., blasted the drugmakers, stating that the executives were called to the Senate hearing "because the way you do business is unacceptable and unsustainable." He attacked AbbVie for using patents to protect exclusivity for immunology drug Humira, and tying executives' compensation to sales of the top-selling drug.

Wyden railed against AstraZeneca, J&J, Merck, Pfizer, and Sanofi for hiking drug prices. And he singled out Bristol-Myers Squibb for criticism by pointing out that the company's spending on dividends, stock buybacks, and administrative, sales, and marketing expenses was nearly three times greater than its investment in research and development.

Committee chairman Sen. Chuck Grassley, R.-Iowa, wasn't nearly as hostile toward the executives. However, Grassley said that he was "sick and tired of the blame game" of different players in the prescription-drug supply chain pointing the finger at other players as the main culprits for high drug prices.

So did the leaders of the world's biggest drugmakers promise to slash drug prices to avoid the wrath of Congress? No. Don't expect your out-of-pocket costs for prescription medications to fall anytime soon because Sen. Wyden detests big pharma and Sen. Grassley doesn't like finger-pointing.

Do investors have to worry that Bristol-Myers Squibb or others will cut their dividends because a senator doesn't agree with their spending priorities? Again, the answer is no.

The reality is that congressional hearings are often a lot of smoke and no fire. Very little will change for American consumers who buy prescription drugs, or for the millions of investors who own shares of big drugmakers, in the near term.

Some changes could be on the way

Still, the political winds appear to favor some changes. The most likely change would probably be to the current system, in which drugmakers give rebates to pharmacy benefits managers (PBMs) and insurers. This lowers the cost of drugs for the PBMs, but the rebates aren't always passed on to consumers. The Trump administration has already proposed eliminating rebates.

Pfizer CEO Albert Bourla was one of several of the executives who stated that their companies would lower list prices if this proposal was enacted. Bourla said: "It is our very clear intention that we will not keep a single dollar from these rebates. We will try to move every single penny to the patients."

There could also be bipartisan support for removing regulatory obstacles to value-based pricing for prescription drugs. In such pricing arrangements, drugmakers and payers negotiate pricing based on a drug's overall benefit.

Merck CEO Kenneth Frazier expressed strong support for that type of pricing, stating that "moving to a system where we are reimbursed for the value our medicines provide would be revolutionary." Other executives, including AstraZeneca CEO Pascal Soriot, agreed that value-based pricing would help lower overall costs.

The pharmaceutical industry doesn't like one change that could be on the table: Medicare negotiating directly with drugmakers over drug prices. But the approach has support among Democrats, and has been endorsed by President Trump in the past.

Perhaps the most controversial suggestion, though, is the idea of tying Medicare's payments for drugs to prices charged for those drugs in other countries. The Trump administration has proposed such an approach, but AbbVie CEO Rick Gonzalez warned that his company would have to cut back its investment in developing new drugs if U.S. drug prices fell to the levels charged in other countries.

How you might be impacted

While you might not be affected in the short term by the showdown over drug pricing, there will likely be some repercussions over the long run. The growth rates for prescription drug prices could moderate if several of the proposed changes are put into place. Many drugs could become more affordable for patients.

The devil is in the details of what specific changes are made and how they're implemented, though. Drugmakers invest billions of dollars in research and development in the hopes of making significant profits. If their opportunities for generating returns lower too much, they will -- as AbbVie's Gonzalez mentioned -- have financial incentives to reduce their investments in developing new drugs. That could end up costing the healthcare system, and patients, more over the long run.

Check out the latest earnings call transcripts for companies we cover.

Although there have been plenty of theatrics in Washington over drug pricing, J&J executive Jennifer Taubert correctly pointed out that prescription medications represent only 14% of total healthcare spending in the U.S., and that industry net prices for prescription drugs have increased at a much lower rate than that of overall medical inflation.

High drug prices are a problem, but they're arguably not the biggest problem for the U.S. healthcare system.

Keith Speights owns shares of AbbVie and Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$44.14 (0.87%) $0.38
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$87.55 (1.66%) $1.43
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$163.20 (%)
Sanofi Stock Quote
Sanofi
SNY
$39.19 (3.08%) $1.17
Bristol Myers Squibb Company Stock Quote
Bristol Myers Squibb Company
BMY
$70.53 (-0.79%) $0.56
AstraZeneca PLC Stock Quote
AstraZeneca PLC
AZN
$55.55 (1.29%) $0.71
AbbVie Inc. Stock Quote
AbbVie Inc.
ABBV
$138.32 (3.06%) $4.11

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