Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Raises Are Finally Keeping Pace With Prescription Drug Costs
Transcript
- Lucas: So the latest data on average hourly earnings has private-sector workers pulling in $37.60 an hour, and core CPI is still running at a pace where that raise is getting eaten up in places you might not expect. Today I want to look at one category that's been quietly stubborn: prescription drugs. Luna: I feel like we hear all the time that drug prices are soaring, but is that actually true across the board? Or is it more nuanced? Lucas: It's genuinely mixed. The headline numbers can be misleading because they lump together brand-name drugs that are still under patent with generics that have been on the market for years. The generics are often getting cheaper, but the brands are where the real inflation is. Luna: So if you're taking a generic, your costs might be going down, but if you're on a branded med, you're feeling the squeeze. Lucas: Exactly. And that's the split we need to understand. Look at the data from the Bureau of Labor Statistics: the CPI for prescription drugs has actually been pretty tame over the past year, but that's because generics are dragging the average down. The out-of-pocket experience for a lot of people is different. Luna: What's driving that divergence? Is it just patent cliffs, or is there something else going on? Lucas: A big piece is the wave of patent expirations we've seen on some blockbuster drugs in the last couple of years. When a brand loses exclusivity, the generic version comes in at a fraction of the price, sometimes 80 or 90 percent lower. That's been a huge tailwind for overall drug CPI. Luna: But for people on the newer, more innovative drugs, there's no generic alternative. So they're stuck paying whatever the manufacturer sets. Lucas: Right. And those newer drugs are often the ones for chronic conditions like diabetes, rheumatoid arthritis, or cancer. They're also the ones where list prices keep climbing year after year. The inflation reduction act had some provisions to cap out-of-pocket costs for Medicare beneficiaries, but that doesn't help everyone. Luna: So if your raise is, say, 4 percent and your branded drug's list price goes up 8 percent, you're effectively losing ground. That's the real-world impact. Lucas: That's the core issue. And it's why we're seeing more attention on pharmacy benefit managers and the rebate system. There's a growing push to make the pricing more transparent, but it's a complex web. Luna: I read that the government debt just passed $40 trillion, which is more than double what it was a decade ago. How does that connect to drug prices? Lucas: It connects through the government's purchasing power. Medicare is the largest buyer of prescription drugs in the country. When the deficit balloons and the Treasury has to issue more debt, that puts pressure on interest rates, which feeds into the cost of capital for drug companies. But more directly, the debt situation is pushing policymakers to look for savings, and drug pricing negotiations are an obvious target. Luna: So the $40 trillion debt is kind of the backdrop for why we're seeing more aggressive moves on drug prices, like the Medicare negotiation program. Lucas: Exactly. And that's where Treasury Secretary Bessent's recent comments come in. He's been trying to calm the bond market, but the headlines are saying his gambit is actually stirring inflation worries. If long-term inflation expectations drift higher, that's going to feed into next year's price increases for everything, including drugs. Luna: So the bond market is basically telling us that inflation might not be as dead as we thought. Lucas: Right. The ten-year breakeven inflation rate is sitting at 2.34 percent, which is actually not too bad, but there's a lot of chatter that the fiscal situation could push that higher. And for workers, that means the purchasing power of your raise could get chipped away faster. Luna: You know, I was thinking about this earlier — we talk a lot about big-picture numbers like CPI and GDP, but for most people, the price of a specific medication is what hits their wallet. We've been running this show for a while now, and if you've gotten something out of our breakdowns, even a couple of dollars a month makes a real difference. You can support us at buy me a coffee dot com slash fexingo. It genuinely keeps these episodes ad-free. Lucas: Yeah, it really does add up. We don't run ads, so listener support is what keeps this going. And it's not about big amounts — small contributions from people who find the show useful are what keep us going. Luna: Exactly. And speaking of what keeps going, let's get back to the pharmacy counter. I wanted to ask about the actual numbers — what's the year-over-year change in drug prices? Is it really as low as the CPI suggests? Lucas: The CPI for prescription drugs is up about 1.2 percent over the past twelve months, but that's the average. When you break it down, brand-name drugs are up closer to 4 percent, while generics are down maybe 2 percent. So if you're on a mix, your experience can vary a lot. Luna: That's a huge spread. And I guess it also depends on whether you have insurance that covers the drug and what tier it's on. Lucas: Absolutely. Insurance design is a big part of the story. Some plans have high deductibles or coinsurance, so even if the list price doesn't change, your out-of-pocket can jump. And then there's the whole mess of copay assistance programs and patient savings cards, which can make the actual price you pay even more opaque. Luna: So the real takeaway is that while the average worker's raise is finally outpacing overall inflation, that doesn't mean it's outpacing the costs they actually face. Lucas: That's the nuance. The employment cost index for wages is up 2.6 percent over the past year, and overall CPI is running around 2.4 percent, so on average, raises are just barely ahead. But if your drug costs are going up 4 percent or more, you're falling behind in that category. Luna: And it's not just drugs — it's also things like rent and healthcare services. We've covered those in past episodes, so it's not a new story. But I think the drug piece is particularly interesting because it's so concentrated. Lucas: Exactly. And there's a policy angle: the Inflation Reduction Act's Medicare negotiation is starting to have an effect, but it's limited to a small set of drugs. The bigger shift might come from state-level initiatives or more aggressive moves by employers to push back on prices. Luna: Are there any signs that the industry is changing its pricing behavior in response? Lucas: There are some early signals. A few drugmakers have announced more moderate price increases this year, partly because of the public backlash and partly because of the negotiation threat. But the patent cliff is still the biggest factor — we've seen a massive wave of expirations in the last couple of years, and that's kept the overall index low. Luna: So if you're one of the lucky ones on a drug that's gone generic, you're probably seeing real savings. But if you're on a newer, branded drug, you're still in the crosshairs. Lucas: Right. And that's why the advice is always the same: talk to your doctor about whether there's a cheaper alternative, and check if there's a patient assistance program. But that's not a systemic fix. Luna: What do you think, Lucas, is the most likely scenario over the next year? Will the average worker's raise continue to outpace drug inflation, or could that flip? Lucas: Given the current trends, I'd say the average should hold up, but the distribution is wide. If you're on a specialty drug, you could see double-digit increases. And if the bond market gets spooked and long-term expectations drift up, that could push all prices higher. Luna: So it's kind of a fragile equilibrium we're in right now. Lucas: Fragile is a good word. The labor market is still tight, which is supporting wage growth, but the fiscal and monetary backdrop is uncertain. For now, the average worker is just barely keeping pace, but it's not a comfortable margin. Luna: And for the listener who wants to know what to do with this information — I guess the takeaway is to be aware of what your own drug costs are doing and to shop around. Lucas: Definitely. And also to pay attention to policy changes. The Medicare negotiation list is expanding, and that could have spillover effects to the private market. It's worth keeping an eye on. Luna: Thanks for breaking this down, Lucas. It's a lot clearer now. Lucas: Anytime. And remember, if you want to support us, the link is buy me a coffee dot com slash fexingo. We'll be back next time with another angle on how your paycheck stacks up against the cost of living.