NYT Confuses Drug Price Story

The NYT had an interesting piece today on the slower rate of growth in drug prices in recent years. Unfortunately, the piece overstates the extent to which drug price inflation has fallen because it ignores a change in the methodology used to calculate inflation in the drug component of the CPI. Until the mid-nineties, generic drugs were treated as new drugs, that were altogether distinct from the brand drug to which they were equivalent. Beginning in the mid-nineties, the Bureau of Labor Statistics started to treat generics as being identical to the brand drug. This meant that if the generic cost 20 percent of the price of the brand drug, it would be recorded as an 80 percent decline in the price of the drug. This change in methodology had the effect of lowering the measured rate of inflation in prescription drugs by 2-3 percentage points. The article also misses an important factor behind the slow rate of growth in spending on drugs: the slower pace of innovation by the pharmaceutical industry. Most of the rise in spending on drugs is not the result of the same drugs costing more, but rather the fact that newer (and ostensibly better) drugs cost more than older drugs. In recent years the pace of new drug approvals has slowed sharply. This has prompted studies by both the FDA and GAO that sought to find an explanation for the the slowdown. This fact should have been mentioned in the article.

--Dean Baker