COMMENTARY: The real profiteers in health care aren’t drugmakers

Pressure is building on Capitol Hill for Congress to codify President Donald Trump’s “most favored nation” drug-pricing initiative into law.

The administration has already struck deals with more than a dozen drugmakers to sell medicines to Medicaid, the federal-state health plan for low-income individuals and the disabled, at the lowest prices paid by other developed nations. Now lawmakers are debating whether to impose the same framework across the U.S. market.

The effort is premised on a familiar claim — that pharmaceutical companies are reaping outsized profits at patients’ expense. The data tells a very different story.

In fact, drug manufacturers are among the least profitable players in the health care system.

Consider returns on capital — a standard measure of how much profit companies generate from the money invested in their business. Between 2022 and 2024, biopharmaceutical manufacturers earned an average return on capital of about 10.3 percent. That’s well below the 15.2 percent average across U.S. industries overall.

Other actors in the health care market did far better. Hospitals and health care facilities earned returns of 20.6 percent. Healthcare IT companies generated 15.4 percent.

The biggest profits were concentrated among middlemen.

Companies in the health care support-services sector, which includes insurers, pharmacy benefit managers and drug wholesalers, posted returns of 41.4 percent, four times what drugmakers earned.

In other words, the highest profits in health care aren’t going to the companies developing new medicines. They’re going to the intermediaries that manage the system through which those medicines are distributed and paid.

That distinction matters because drug development is an incredibly expensive and risky enterprise.

Bringing a new medicine to market typically takes 10 to 15 years and costs several billion dollars. Most drug candidates fail long before they reach patients. Even among those that receive approval, many never garner enough revenue to deliver a positive return on the investment in their development.

To sustain this high-risk process, pharmaceutical companies invest heavily in research and development. On average, drug manufacturers devote one-third of their revenues to R&D, far more than any other part of the health care market. Hospitals, insurers and PBMs invest almost nothing by comparison.

These investments are why the United States is the world’s leading source of new medicines. Over the past several decades, American biopharmaceutical innovation has produced groundbreaking treatments for cancer, heart disease, diabetes and countless rare conditions.

Policies that squeeze manufacturers’ revenues threaten that progress.

The 2022 Inflation Reduction Act empowers the federal government to impose price controls on certain medicines in Medicare. Under the law, 10 drugs dispensed through Medicare Part D’s prescription drug benefit are subject to price controls this year. Fifteen more get hit with price caps in 2027. The following year, 15 more covered by Part D or Part B, the physician services benefit, will face price controls. And in 2029 and each year thereafter, 20 more drugs across both parts of the entitlement will have their prices controlled by the federal government.

Trump’s proposed Most Favored Nation policy would effectively import price controls that are in effect in other developed countries into our market.

These policies may appear to offer a quick way to lower drug prices in the United States. However, they risk undermining the incentives that sustain medical innovation.

More important, they target the wrong part of the system.

Much of the dysfunction in drug pricing stems from the opaque network of intermediaries that dominate the pharmaceutical supply chain. Pharmacy benefit managers negotiate rebates and discounts from drug manufacturers. Patients’ cost-sharing obligations are often based on the much higher list price rather than the discounted one.

The result is a system in which middlemen retain a large share of the savings. Patients continue to pay high out-of-pocket costs that they do not see at the pharmacy counter.

If policymakers are serious about lowering prescription drug costs, they should focus their attention there.

They can require PBMs to pass negotiated rebates directly to patients at the pharmacy counter. They can insist on increased transparency in drug pricing contracts. And they can scrutinize the vertically integrated structures that allow insurers, PBMs and pharmacies to profit at multiple points in the supply chain.

The real profits in health care aren’t flowing to the laboratories that discover new medicines. They’re being captured by middlemen who control how those medicines reach patients.

Sally C. Pipes is the president, CEO and Thomas W. Smith fellow in Health Care Policy at the Pacific Research Institute. She wrote this for InsideSources.com.