A Solution in Search of a Problem

In his State of the Union address, President Biden touted the drug-price controls in his Inflation Reduction Act (IRA). Though the price controls have yet to take effect, Biden proposed expanding these measures, which threaten to destroy pharmaceutical innovation and harm the nation’s health.

The IRA’s drug-price controls are a solution in search of a problem. Two years ago, the Congressional Budget Office (CBO) found that per capita prescription-drug spending in real terms had fallen as a percentage of total spending on health care since the mid-2000s. Retail prescription drug prices have gone up at a slower rate than have hospital prices and health-care prices generally. According to researchers at the health-care data group IQVIA, U.S. drug spending is lower as a percentage of national health expenditures than the average drug-spending share across 11 developed countries.

While price-control proponents focus on drugs’ high list prices, the average net price of a prescription—the amount that users actually paid after subtracting manufacturers’ discounts and rebates—has been falling, according to CBO. This reflects the increased use of generic drugs, which cost far less than name-brand pharmaceuticals and now account for nine out of ten prescriptions. In fact, U.S. patients use more generics and pay less for them (16 percent less, on average) than do patients in other developed countries.

None of these factors deterred the IRA’s drafters from including drug price controls in the August 2022 statute. The IRA directs the secretary of Health and Human Services to choose negotiation-eligible drugs from among the single-source drugs with the highest Medicare expenditures. HHS Secretary Xavier Becerra has already selected the first ten drugs and is now negotiating “Maximum Fair Prices,” which will go into effect in 2026. Eventually, HHS will impose price controls on 20 drugs per year.

The agency’s drug-selection process risks imposing artificially low prices on the most valuable treatments, thereby depressing supply and harming patients. Expenditures can be high because prices are high or because large quantities are used. Drugs could be selected precisely because they are beneficial and widely used, regardless of whether they have unreasonably high prices. The secretary’s drug selection decisions are final.

In addition, the IRA-outlined process doesn’t allow for real negotiation between regulators and the drug companies. The Centers for Medicare and Medicaid Services effectively enjoys unlimited power to set drug prices, and drug manufacturers have no recourse to administrative and judicial review. If a company does not agree to the price CMS sets, it faces two financially ruinous options: a confiscatory excise tax of up to 95 percent of all sales of the drug, or the withdrawal of all its drug products from the Medicare and Medicaid programs.

Read the full article on City Journal.