Fight erupts over price controls for medications

(Image courtesy Pixabay)

[Editor's note: This story originally was published by Real Clear Health.]

By Kenneth Schrupp
Real Clear Health

In response to U.S. prescription drug spending rapidly outpacing inflation, reaching an estimated $358.7 billion in 2020, President Biden last week demanded that Congress adopt strict federal price controls on prescription drugs. Though certain prescription drugs can be expensive, the main measures that Biden has proposed — adopting government price controls to cap annual out-of-pocket drug spending for Medicare beneficiaries, empowering the Secretary of Health and Human Services to choose pharmaceutical winners and losers, and financially crippling penalties for pharmaceutical companies that don’t acquiesce to price controls — are likely to have disastrous effects on the availability of critical medications. What’s more, they’re deeply unpopular with the overwhelming majority of Americans, and could prove to be a significant fiscal and health liability for our nation in the years to come.

While putting in government price controls to cap annual out-of-pocket drug spending for the growing number of Medicare beneficiaries to $3,000 per year would limit direct spending by beneficiaries, the total costs of doing so would shift a greater portion of seniors’ Medicare drug spending to taxpayers (often seniors themselves), remove any cost-savings incentives, and severely discourage drug development. Currently, seniors spend an average of $3,875 per year out-of-pocket on drugs because Medicare already picks up most of the tab; American seniors take an average of five drugs (seven for those in nursing homes) that each cost (in name-brand form) an average of $6,604 per year, or $33,020 in total, leaving taxpayers on the hook for the majority of seniors’ drug costs.

Placing this cap on out-of-pocket spending, though well-intentioned, would not only shift even more of the cost burden on taxpayers, but would also eliminate any incentive to choose cost-effective treatment options after reaching one’s spending cap. With our rapidly aging population (those 65 and older will outnumber children by 2034) and decades long decline in our workforce participation rate, these higher Medicare program costs would sadly constitute a wealth transfer to the old and politically powerful from poorer, smaller and younger generations struggling to get off the ground.

Worst of all, using price controls to try to offset much of this increase in spending is likely to significantly reduce the number of drugs that enter the research and development pipeline. According to the National Bureau of Economic Research, cutting prices by 40 to 50 percent in the U.S. would lead to between 30 and 60 percent fewer drugs entering the research and development phase. Given that drug prices would need to drop 91% for Biden’s prescription drug plan to be cost neutral, adopting this measure could mean the 53 drugs approved by the FDA in 2020 would mean a loss of at least 20 fewer drugs being approved each year. Those 20 drugs could leave millions of people being deprived of treatments for life-threatening conditions like cancer or liver disease that won’t be developed simply because of ill-informed government policy.

To further this increase in spending, Biden wants Congress to authorize Medicare to negotiate drug prices, as done by the Veterans’ Health Administration (VA), which pays less overall for prescription drugs than any US government organization, but it’s not likely this plan would work in the context of Medicare. As detailed in a Government Accountability Office report, the VA doesn’t actually pay less than other agencies for name-brand drugs — its ability to secure lower prices on generic drugs, and for its physicians, as part of an integrated, single system of hospitals and doctors serving a single, defined population, to prescribe the most cost-effective medications are the keys to its fiscal efficacy.

Yet because Medicare relies on offering a number of formularies to encourage competition that keeps costs lower, and is not an integrated system but a hodgepodge of contractors ranging from pharmacies to physicians that serve more than just Medicare beneficiaries, actually implementing a VA-style system would, according to the Congressional Budget Office (CBO), have little impact, if any, on Medicare spending. In fact, it would only serve to empower the presidentially appointed Secretary of Health and Human Services to pick winners and losers in the most heavily lobbied sector of the US economy, potentially decreasing cost efficiencies (and worsening treatment options) even further. Influence peddling and political corruption need to be expunged from our healthcare system, not made more intractable.

The final piece of Biden’s “solution” to rising drug prices is to limit to inflation the amount pharmaceutical companies can raise the price of drugs each year. Yes, pharmaceutical companies are doing fairly well, but tying price increases to the federal government’s measure of inflation — which is lower than the actual rate of inflation to minimize expenditures for programs like Social Security — will, over the long run, create vast imbalances in drug prices that will result inevitably result in drug shortages due to the mismatch between price and supply. Such a move would also limit the number of drugs available on the American market. Today, America enjoys access to nearly 90% of new medicines, whereas France, which used to be a pharmaceutical leader but now has strict price controls, has access to just 48% of new medicines. To maintain American access to life-saving medications and avoid the fate of France, the siren song of price controls must be ignored.

Fortunately, Americans intuitively know these policies won’t work; a new YouGov/Americans for Prosperity poll suggests Americans have a more sensible idea of how to get drug prices back under control than what Biden, Nancy Pelosi, and her allies in Congress (if we’re being generous) have in mind. Sixty-eight percent of surveyed Americans believe “promot[ing] greater competition and cut[ting] the red tape that increases costs,” not “strictly control[ling] the price of prescription drugs,” is the key to lowering the cost of prescription drugs. By a ratio of nearly two to one, Americans even prefer allowing certified safe drugs of higher cost and uncertain efficacy to be approved for the market so that patients can have a chance to try them. More innovation and more competition are a proven recipe for success, and the American people know it.

Expanding the supply of available drugs, rather than constraining future drug development, is a clear priority for the American people and ought to be respected as such. Rather than rolling out the red tape, picking winners and losers, and feeding fiscal monsters, President Biden should listen to the American people. While it’s understandable Americans want to pay less for their medications, empowering crony capitalism and compounding market inefficiencies is guaranteed to make things worse. Instead, basic measures to reduce drug prices by increasing competition at both the consumption and supply ends of the drug industry like mandating drug price transparency and reducing red tape at the FDA would yield the financial relief and drug choice that the American people deserve.

Kenneth Schrupp is a Young Voices contributor writing on the intersection of business, politics, and media.

[Editor's note: This story originally was published by Real Clear Health.]

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