Bill supporters think the idea is popular with Americans based on push polls that have essentially asked if voters want the government to make their medicines cheaper. Who in their right mind would say no to that?
What the special interests behind these polls usually fail to mention is that allowing Medicare to tell drug makers how much they can charge for their products or face a tax of up to 95% isn’t negotiation — it’s hostage taking. Furthermore, in every country that has experimented with price controls — whether on drugs or any other good — investment in the controlled product shrinks, and consumers are left with less access.
That’s the reality facing Americans. According to University of Chicago health economist Tomas Philipson and his colleagues, legislation that passed the House last year and is very similar to the Senate’s current proposal would lead to as many as 135 fewer new drugs over the next two decades. While the CBO forecasts a much smaller impact, it underestimates the stifling nature price controls will have on innovation.
CBO also doesn’t say which new drugs will be affected, but research shows that cancer R&D stands to take a massive hit under a price control regime. Philipson estimates that the impact on cancer treatments will reduce overall annual cancer R&D spending by about $18 billion per year. Patients would miss out on 9.4 times as many new cancer drugs as they would gain from President Biden’s cancer moonshot plan.
The result? Higher cancer mortality rates and hundreds of millions of lives cut short. 331 million years to be exact, Philipson estimates.
Supporters of price controls might feel emboldened by polling, but those surveys generally gloss over the steep tradeoffs involved with price caps. Moreover, most polls these days show that inflation — not prescription drug costs — is Americans’ top concern. Price controls, however, would do nothing to reduce medical inflation, which rose by 3% in June. That’s because prescription drugs represent a small sliver – just 10% – of the roughly $4 trillion America spends annually on health care.
In fact, Philipson’s latest study shows that spending on pharmaceutical drugs is not driving overall health spending in the U.S. Annual drug spending has actually contributed negatively, -4.6%, to total annual total healthcare spending growth over the past two decades. Labor costs – not prescription meds – are the real culprit, accounting for more than 70% of total health spending. Philipson finds that drug price controls would increase total annual healthcare spending by $50.8 billion over the next two decades.
A big reason why spending on prescription drugs is relatively low is because Americans have robust access to generic drugs that tend to be much less expensive than their brand name counterparts. It’s true that certain brand name drugs have high list prices, but price fixing is not the answer. A far better approach is for lawmakers to end drugmaker abuses such as patent evergreening, pay-for-delay agreements, “brand-name generics,” and anti-competitive use of Food and Drug Administration citizen-petitions. These and similar reforms would go a long way to promoting the kind of healthy, price-reducing competition Americans need.
The Lower Costs, More Cures Act (H.R.19), the Prescription Drug Pricing Reduction Act of 2019 (S.S2543), and the Prescription Drug Pricing Reduction Act of 2020, S.4199 offer a good starting-point for bipartisan discussion. Happily, these reforms are nonpartisan and can be passed without controversy, unlike the innovation-stifling government price controls found in the Senate’s partisan reconciliation proposal.
As we’ve learned from the remarkable success of COVID-19 vaccines, the key to unleashing private-sector innovation and abundance — and saving lives — is not to impose needless government barriers, but to remove them. Moreover, telling Americans that prescription drug price fixing will alleviate the pain of inflation, as the president has been doing, is misleading at best and an outright lie at worst.
Instead of imposing price controls on pharmaceutical drugs, lawmakers should give Americans a personal option that controls drug costs naturally through robust, price-reducing competition, without shortages or stifling innovation.
