"Medicine" By The Focal Project licensed under CC BY NC 2.0

President Biden’s new proposed budget for Fiscal Year 2025 calls for an expansion of the drug price controls passed in the Inflation Reduction Act (IRA). These price controls will create shortages, increase costs on other drugs, and discourage companies from entering the market. In healthcare, shortages and a lack of innovation cost lives.

In addition to other burdensome changes to Medicare, the IRA gave the Health and Human Services Secretary the authority to “negotiate” the price of prescription drugs on behalf of Medicare.

In reality, the bill gave the Secretary power to simply determine the price he or she deems acceptable and impose a steep tax of up to 95 percent on companies who charge more. Starting in 2026, 10 drugs will be subject to price controls under Medicare. Roughly 16 percent of Medicare enrollees used these selected drugs in the last year. The number of drugs the HHS Secretary sets prices for will increase to 15 in 2028 and 20 in 2029. 

Biden’s budget would expand this disastrous policy by significantly increasing the pace of so-called negotiation and subjecting drugs to price controls sooner after they launch. Both of these changes would increase the cost of innovation for drug manufacturers.

These changes will 1) ensure companies have little time to prepare for their “negotiation” and hit to their bottom line and 2) give companies even less time to recoup their R&D costs on a drug before being subject to potential price controls.

Under the current law, the price control provisions will already lower R&D activity so drastically that it will result in 135 fewer new drugs, generating a loss of 331.5 million life years in the United States, more lost life years than the first two years of the coronavirus pandemic.

These consequences are not hypothetical anymore, even though the determined prices haven’t gone into effect yet. Several drug manufacturers have warned of development programs they had to end or will likely have to end, including Eli Lilly, Alnylam, Bristol Myers Squibb, AstraZeneca, Novartis, Sage Therapeutics, Amgen, etc.

Increasing the cost of innovation even more will prove devastating.

Notably, in an industry like drug development, the risk is already very high. These policies are developed under an assumption that manufacturers are charging high prices to squeeze consumers and receive incredible profits. This is false.

During an average drug development process, a manufacturer must invest an average of $2.6 billion and spend 11.5 to 15 years in research and development. Even so, most drug development programs fail.

As detailed by Stephen Ezell of the Information Technology & Innovation Foundation (ITIF), as little as 0.05 percent of drugs make it from drug discovery to clinical trials. Of the few medicines that make it to clinical testing, only about 12 percent of medicines that begin clinical trials are approved for introduction by the FDA. Even if a drug is approved, it is likely that the profits from said drug will not recoup its R&D costs. One study in the Health Economics journal found that 80 percent of new drugs made less than their capitalized R&D costs.

Starting a new drug program is, statistically, an almost guaranteed financial loss for drug manufacturers. Simply, it is bad policy to add on to already-high risks. Especially because, in doing so, countless life-saving and life-preserving medications will not be made.

Without giving any thought to the consequences or tradeoffs of “just making companies charge less for drugs,” the Biden Administration will be responsible for an abhorrent loss of life years because of its policies.