October 21, 2021

Government Price Controls: A Threat to Innovation and Cures


KEY TAKEAWAYS

  • Democrats are pushing to have the federal government set prices for prescription drugs.
  • Their heavy-handed, bureaucratic plan would have devastating consequences for Americans, causing more suffering and earlier deaths.
  • Democrats’ proposal would lead to as many as 342 fewer new medications over the next two decades and would slash research by as much as 60%. 

Democrats are determined to have the federal government set drug prices. While they try to spin their radical plan as “negotiating prices” with manufacturers, the fine print says otherwise; their proposal would allow government bureaucrats to pick the price they want to pay. The scheme would result in a substantial reduction in lifesaving cures and treatment options for sick Americans. A recent study shows Democrats’ proposal would lead to as many as 342 fewer new medications over the next two decades and would slash research by as much as 60%.

What to Expect from Price Controls

What to Expect...

BUREAUCRATIC price controls for drugs

President Biden and Democrats in Congress have included language in their reckless tax and spend spree that would force pharmaceutical makers to “negotiate” prices with the secretary of health and human services. Democrats define “negotiation” as allowing Washington to set the price it wants to pay for a drug and to regulate all sales covered by Medicare and private insurance.

As the proposal is currently drafted, every year the secretary would choose a set of drugs from two lists: the 125 drugs with the highest net outlays in Medicare Part D; and the 125 drugs with the highest net outlays generally. In the first year, 2023, the secretary would choose at least 25 drugs from the two lists and dictate the prices for them. In subsequent years, this would increase to at least 50 drugs. Additional drugs would also be subject to the scheme, including essentially all insulin products and a subset of new high-cost therapies that would likely comprise many treatments for rare diseases.

The secretary would publish the list by April 15 each year and manufacturers would have until June 15 to enter into the negotiation process, which would also trigger burdensome and invasive reporting requirements. As the bill is currently drafted, the first list of government-set prices would take effect in 2025. The prices set by the secretary could not exceed the volume-weighted average prices across six specified foreign countries: Australia, Canada, France, Germany, Japan, and the United Kingdom. The government, rather than doctors, would get to decide the drugs people have access to. In several of these countries, the government relies on controversial metrics such as “quality-adjusted life years” that treat the lives of the elderly, the disabled, and other vulnerable groups as less valuable than other people’s when deciding to cover a new drug. Price increases for these drugs in future years would be capped at the core rate of inflation.

If a manufacturer pushes back and refuses to comply, or even if it misses certain deadlines by as little as a day, the federal government would inflict a devastating excise tax on the company’s sales. This tax on gross revenues for each drug would begin at 65% and increase by 10 percentage points every 90 days of non-compliance. The excise tax could go as high as 95%, a penalty so high that the Joint Committee on Taxation anticipates innovators might choose to pull some products from the market entirely. Apart from the financial absurdity of this situation, this proposal also raises serious constitutional questions, including whether it exceeds Congress’s taxing power under Article I.

harming Innovation

The life sciences industry is research-intensive, and much of that research never pays off. More than 90% of biopharmaceutical firms are not turning a profit. According to a 2016 study from the Tufts Center for the Study of Drug Development, it cost an average of $2.6 billion to develop and gain marketing approval for a new drug. Post-approval research and development added another $312 million, bringing the total cost for a drug to roughly $2.9 billion. Developing a new drug takes an average of 11 to 15 years of research, development, and clinical trials. Among drugs that enter clinical trials, only around 12% are ever approved. For medications that make it to market, one study found that four out of every five new drugs make less than their capitalized development costs.

Because this research is high-risk, expensive, and time-consuming, expected earnings can have a decisive effect on pharmaceutical companies’ investment. Reduced revenues lead to less innovation, meaning fewer new treatments and cures. The Congressional Budget Office estimates that implementing the price-fixing program would result in two fewer new drugs between now and 2029, 23 fewer in the next decade, and 34 fewer in the third decade.

Other analyses have found that the bill’s impacts on biomedical advances would likely be far more damaging than CBO projects. A September study from the University of Chicago found that H.R.3, the Lower Drug Costs Now Act, included in the Democrats reckless tax and spend spree, would result in “a 29 to 60 percent reduction in [research and development] from 2021 to 2039.” This reduction in research investment would lead to between 167 and 342 fewer drug approvals over that time. The study’s authors wrote that they “conservatively find the loss in life from the price controls over the next 10 years is 20 times larger than the loss from COVID-19.”

The Democrats’ proposal also risks weakening our economy and jeopardizing our national security. A March report prepared for the drug industry predicted that the price control plan would eliminate nearly one million jobs across the economy, including close to 200,000 in the life sciences industry. Another report noted that policies like Democrats’ proposed price controls could jeopardize the United States’ competitiveness in the biopharmaceutical industry and provide an opening for China and other countries.

America’s drug companies have created medications and vaccines that have improved the quality of life for millions of patients. Democrats’ proposal would damage the production of these kinds of cures. Operation Warp Speed, in which manufacturers delivered COVID-19 vaccines in record time, showed the necessity of pharmaceutical innovation. Any efforts to reform drug pricing must take into account the effect regulation would have on innovation and patients’ health. 

Issue Tag: Health Care