As expected, Democrats’ price controls on drugs, passed in the so-called “Inflation Reduction Act (IRA),” have already hindered research and development of new medicines. Several drug manufacturers have officially ended drug-development programs, citing new price controls.
It is imperative that lawmakers address these issues with the IRA through a full repeal of these provisions or, at the very least, oversight hearings to investigate the many consequences of this legislation.
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 Secretary is given the 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.
In 2023, the Secretary will be able to determine the prices of 10 prescription drugs. The determined price will go into effect in 2026. The number of drugs the HHS Secretary could set prices for will increase to 15 in 2028 and 20 in 2029.
At the time of passage, conservative advocacy groups and Republican lawmakers warned that this would stunt new, important research and development. After all, manufacturers will not begin expensive R&D projects if they can expect the government to eat up any profits they make from the medicine. This is especially true for developing treatments for common, but severe, ailments like cancer, diabetes, heart disease, and Alzheimer’s. Manufacturers seeking to cure these diseases understand that they would be the target of a government price control scheme.
Now, as the HHS begins its “search” for medicines to impose price controls on, several drug manufacturers have warned of development programs they have already had to end/programs they will likely have to end in light of the IRA:
- Eli Lilly CEO Officer Dave Ricks said the company had already dropped a blood cancer drug from its pipeline because they “couldn’t make the math work.” He explained that, “In light of the Inflation Reduction Act, this program no longer met our threshold for continued investment.”
- Alnylam has suspended its development of a treatment for Stargardt disease, a rare eye disorder, explaining that the company needs “to evaluate impact of the Inflation Reduction Act.”
- Bristol Myers Squibb CEO Giovanni Caforio said that the company expects to halt its funding to certain drugs because of Democrats’ price controls.
- AstraZeneca said that it would be making dramatic changes to its R&D strategies due to the new law. Specifically, it will have to delay the United States’ access to new drugs.
- Novartis, a Swiss drugmaker, warned that the new law could discourage research in its most promising areas of research: RNA, radioligands, etc.
A recent study by University of Chicago economist Tomas Philipson found that these price controls will kill $18.1 billion in annual spending on cancer R&D, wiping out nearly a third of the current annual spending on this research.
As highlighted recently by the Wall Street Journal Editorial Board, countries with similar drug pricing schemes have already suffered the consequences of these policies, specifically in the United Kingdom. A few weeks ago, AbbVie and Eli Lilly announced that they are pulling out of their so-called “voluntary” agreement with the U.K. government to reduce drug spending.
Because of punitive price controls, European countries have far less access to new drugs than patients in the U.S. do, WSJ explains:
“The result for Europe will be less investment and access to life-saving treatments. About 85% of new medicines launched between 2012 and 2021 were available in the U.S., compared to 61% in Germany, 59% in the U.K. and 52% in France and Italy. Bluebird bio in 2021 said it was unwinding operations in Europe and withdrawing gene therapies for rare diseases, citing the challenges of “achieving appropriate value recognition and market access…”
… According to a European Public Health Alliance survey in 2019, nearly half of patients reported that they or a family member couldn’t get a drug they needed. In France, 2,446 drug shortages were reported in 2020, up from 868 in 2018 and 44 in 2008. Two in three French oncologists say shortages of anti-cancer medicines can reduce survival odds.”
Still, these are the conditions President Biden and congressional Democrats wish to subject American patients to.
The government is incapable of setting prices efficiently. In a free market, prices are determined by supply and demand: a balance of how much customers are willing to pay for a product and how much product manufacturers are willing to supply. This results in an equilibrium market price. This price shifts constantly and can even be different based on which state you’re in – there is no possible way for the government to keep up with these rapid changes. Further, the government will never be able to gather or interpret all the knowledge and information necessary for determining the equilibrium. Because the government is incapable of determining the equilibrium market price, the price they set will always be too high or too low. The consequences of both could result in disaster.
If it is too high, manufacturers will make the product in excess and either the government or individuals will pay more for the product than they otherwise would have. While it’s unlikely that the government would set the price of a drug too high in the beginning, this can become dangerous. If left up to a free market, the price of said drug will likely decline over the years. However, if a price control is set, companies are disincentivized to ever sell below that rate.
If a price is set too low, as will be the case under Democrats’ plan, there will be shortages. Manufacturers will supply less of the product than consumers want and/or need. Drug manufacturers will not sell and/or create products they will lose money on.
In 1971, in reaction to a jump in the cost of gasoline, President Nixon imposed price controls (below the equilibrium price) on crude oil and natural gas. This created a real crisis, characterized by massive shortages and long lines at gas stations.
Similarly, drug price controls will discourage investment and innovation in drug development, leading to fewer cures and life-preserving medicines. This, however, will cost lives.
This is an unacceptable consequence.
Outside of a full repeal of these dangerous provisions, as Senator Mike Lee (R-Utah) has introduced in the Senate, House Republicans should use their oversight powers to dig into the many consequences of the IRA.