Government-imposed price controls on goods and services always lead to shortages. For example, economic research has consistently shown that rent control results in less new housing construction. The Biden administration’s imposition of price caps on prescription drugs under the provisions of the Inflation Reduction Act (IRA) will result in much the same thing: fewer new cures developed.
The IRA gives the Department of Health and Human Services (HHS) the authority to negotiate prices on select prescription drugs covered under Part B and Part D of Medicare. The government’s “negotiated” prices actually amount to little more than extortion. If a pharmaceutical manufacturer does not comply with the government’s negotiated price, it faces a choice between an excise tax that eventually rises to 95 percent of its product’s sales in the U.S. or the withdrawal of all of its drugs from Medicare coverage.
The IRA directs HHS to negotiate prices for 10 drugs in 2026, 15 drugs in 2027, 15 more in 2028, and 20 drugs in 2029 and every year afterward. HHS will publish the list of maximum fair prices for these drugs two years before the prices go into effect.
On Tuesday, the Biden administration revealed the first 10 drugs that would be subject to government negotiation. They include the blood thinner Eliquis, the diabetes drug Jardiance, and the rheumatoid arthritis treatment Enbrel. In his statement, President Joe Biden cited an estimate by the Congressional Budget Office that drug price negotiations and inflation rebates will save taxpayers $160 billion by 2031 What he did not mention are the costs of more disease and death the price controls will cause as they slow the development of new pharmaceuticals.
A 2016 econometric study in Forum for Health Economics and Policy evaluated the long-term impact of price controls in Medicare Part D. Applying Veterans Health Administration drug pricing policies to Medicare, a team of researchers from the private health consultancy firm Precision Health Economics calculated that it would “save between $0.1 trillion and $0.3 trillion (US$2015) in lifetime drug spending for people born in 1949–2005.” On the other hand, lower revenues for drug manufacturers would mean that they invest less in new pharmaceutical discovery and development. New drug introductions would fall by as much as 25 percent relative to the status quo, according to the researchers. As a consequence, they report, “life expectancy for the cohort born in 1991–1995 is reduced by almost 2 years relative to the status quo. Overall, we find that price controls would reduce lifetime welfare by $5.7 to $13.3 trillion (US$2015) for the US population born in 1949–2005.” Allegedly “saving” $160 billion over the next 10 years doesn’t look so good now, does it?
In their 2021 University of Chicago working paper, economists Tomas J. Philipson and Troy Durie analyzed how price controls proposed in the earlier and somewhat more stringent Lower Drug Costs Now Act would impact medical innovation. They calculated that the proposed drug price controls would lead to a 44.6 percent decline in pharmaceutical company research and development and 254 fewer new drug approvals between 2021 and 2039. They note that an earlier Council of Economic Advisers’ analysis calculated, owing to the reduction of new drug introductions stemming from the proposed price controls, that 100 fewer new drugs would be developed, resulting in a loss of between 37.5 million to 100 million life-years by 2029 for Americans. For comparison, a team of researchers estimated in 2022 that the COVID-19 pandemic had by then resulted in the loss of 9.7 million life-years in the U.S.
An obviously self-interested survey by the Pharmaceutical Research and Manufacturers of America found that IRA drug price controls were already impacting its members’ research and development decisions. Specifically, 78 percent are expected to cancel early-stage pipeline projects; 63 percent planned to shift research and development away from small molecule medicines; and 95 percent are expected to develop fewer new uses for medicines because of the limited time available before being subject to government price setting.
The shift away from research and development on small molecule drugs (basically pills) occurs in part because the IRA grants only nine years before price controls can be imposed on them, whereas biologics (basically injectables) get 13 years. Also, drug companies would heretofore often introduce new drugs to relatively small patient populations, e.g., those with rare diseases or late-stage illnesses, while continuing to research their efficacy for larger ones. Doing that now would start the nine-year countdown to price controls, so companies will likely delay introducing new drugs while they seek to identify the largest and most lucrative patient population.
The upshot: While the new price controls will make some drugs cheaper in the short run, Americans will be sicker and deader in the long run than they otherwise would have been.
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