Prescription Price Tag: U.S. Taxpayers Cover Nearly 60% of Drug Costs
Public Citizen News / November-December 2024
This article appeared in the Nov/Dec 2024 edition of Public Citizen News. Download the full edition here.
When drug prices climb in the United States, it’s taxpayers who are quietly footing most of the bill.
Federal, state, and local governments directly or indirectly funded 59% of outpatient retail drug costs in 2019—adding up to a staggering $208 billion – according to a recent study co-authored by Public Citizen-affiliated researchers and published in the Journal of General Internal Medicine in October 2024. The $208 billion figure includes both direct expenditures by government programs like Medicare and Medicaid as well as indirect subsidies such as tax breaks for private employer-sponsored insurance plans, subsidies to private Affordable Care Act (ACA) marketplace plans, and premiums paid for public employees. The findings of the study underscore that while patients pay directly at the pharmacy, every taxpayer in the country is financially affected by the high price of drugs.
The findings focus especially on the financial burden created by insulin costs, where taxpayer contributions covered nearly two-thirds of the total $32 billion spent on the drug in 2019. This funding supports the estimated 7.6 million Americans who depend on insulin to manage diabetes, a disease that can lead to severe complications or death if left untreated. Insulin prices have been a central concern for patients and policymakers alike, with prices skyrocketing over recent decades and leaving many patients with diabetes to make difficult, often dangerous, decisions about rationing their medication.
The study’s authors, who include Public Citizen-affiliated researchers David U. Himmelstein MD and Steffie Woolhandler MD, MPH, argue that the current state of drug spending reveals an urgent need for more comprehensive pricing reforms, extending beyond Medicare to private insurers. The recent Inflation Reduction Act (IRA) brought some relief by capping insulin out-of-pocket costs to $35 per month for Medicare beneficiaries, and it imposed penalties on drug companies that hike prices beyond the rate of inflation for Medicare-covered drugs. However, the Senate parliamentarian ruled that extending these measures to private insurance plans would fall outside federal budget regulations, preventing a broader price cap from being added to the bill.
The report’s lead author, Dr. Steffie Woolhandler, notes that this ruling may have failed to consider the full impact private insurer prices have on federal and state budgets. “What we’re really seeing is that high drug prices across the board contribute to government expenses,” Woolhandler explains. “Since taxpayers are essentially paying for a substantial portion of these costs, the government has a real incentive to negotiate lower prices that will benefit everyone.”
The study bases its findings on data from the 2019 Medical Expenditure Panel Survey (MEPS), a widely used source for health care cost and usage data in the U.S. The MEPS data covers outpatient retail prescriptions only, which means that the estimated $208 billion taxpayer expenditure does not even include the cost of drugs administered in hospitals, clinics, or doctors’ offices. This exclusion suggests that the actual financial impact on taxpayers is even greater than the report indicates.
To gain a fuller picture, the researchers examined both direct and indirect government contributions to outpatient drug spending. Direct contributions include government health programs, like Medicare and Medicaid, that pay pharmacies for prescriptions filled by their beneficiaries. These programs contributed around $155 billion, with Medicare alone covering nearly $123 billion in prescription drug costs after accounting for rebates. Medicaid also contributed significantly, paying about $23 billion for outpatient drugs.
In addition to these direct contributions, the report highlights the substantial indirect spending that flows through private insurers. For example, federal and state governments subsidize employer-sponsored private insurance plans, meaning they cover a large share of premiums for government employees. The government also supports private insurance in the ACA marketplace through tax credits and premium subsidies, and it provides tax breaks for private employer-sponsored insurance that significantly reduce costs for employers and employees. All told, these indirect expenditures added another $53.6 billion to taxpayer contributions, which means public money is woven into nearly every layer of the drug cost structure in the U.S.
In its analysis, the study points out how much U.S. taxpayers could potentially save if insulin prices aligned with those in other developed countries. For instance, insulin prices in Canada and the U.K. are roughly 88-92% lower than in the U.S. According to the report, if U.S. insulin prices matched those abroad, American taxpayers could have saved close to $20 billion in 2019 alone. Such savings not only demonstrate the high cost of U.S. insulin but also highlight how much taxpayers could benefit from regulatory reform that puts downward pressure on prices.
The study’s findings arrive at a pivotal moment in the national debate over drug prices, with, on the one hand, growing momentum for broader legislative reforms that would address the high costs patients face and, on the other, a newly elected Trump administration whose allies have proposed rolling back the reforms of the Inflation Reduction Act. According to Dr. Woolhandler, these findings should motivate lawmakers to consider the financial impact of private drug prices on public funds. The report’s authors recommend that Congress revisit the limitations on price regulations that apply only to Medicare, arguing that broadening the scope of regulation could yield significant savings for government budgets and, by extension, for taxpayers. Such an approach could potentially align the U.S. drug market with global norms, where price controls help prevent such drastic out-of-pocket and indirect taxpayer costs.
As it stands, drug pricing remains one of the most contentious issues in U.S. health policy. For patients, especially those managing chronic conditions like diabetes, high drug prices are a burdensome part of daily life. For taxpayers, the issue may be less visible, but the financial burden is substantial and growing. The Taxpayers’ Share of US Prescription Drug and Insulin Costs report reminds us that drug prices are not just a problem for those who need prescriptions—they’re a collective burden, borne by all. With comprehensive reform, the researchers argue, there is a path to significant savings that would benefit patients, taxpayers, and the public health system as a whole.