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.
The IRA’s price controls will stifle needed innovation. The law directs bureaucrats to set below-market prices for drugs before those drugs would have normally become subject to generic competition. This will leave companies with lower revenues than they expected when they undertook the uncertain and costly process of drug development. Only about 12 percent of drugs entering clinical development obtain FDA approval, at an average estimated cost (accounting for failed projects and the cost of capital) of $2.6 billion. The prospect of lower returns on new drugs will discourage future R&D efforts by altering the cost-benefit analysis.
There is no dispute that IRA price negotiations and controls will lead to fewer life-saving drugs coming to market. Research has demonstrated a negative relationship between drug-price controls and pharmaceutical research and the development of and access to new drugs. A review of academic studies found that, on average, a 1 percent reduction in pharmaceutical revenue leads to a 1.5 percent reduction in R&D expenditures. The only disagreement between IRA proponents and critics is how many fewer drugs. Estimates range from dozens to hundreds fewer drugs over the next few decades than there would have been otherwise.
Biden proposed expanding the annual number of negotiated Medicare drugs to 50—“500 different drugs over the next decade.” If this materializes, essentially every single-source Medicare drug with significant expenditures will carry a bureaucratically imposed price.
The proposal would worsen the IRA’s negative impact on drug development and, ironically, disproportionately hamper Biden’s “Cancer Moonshot,” which aims to “drive innovation” that will “end cancer as we know it.” At least half of the new drugs in the pipeline are oncology drugs, which are much less likely to make it through clinical trials (3.4 percent) and more expensive to develop than other types of medicine. The average cost of bringing a new cancer drug to market is $4.5 billion, two to three times the cost of any other therapeutic category. Manufacturers will be loath to pursue new cancer drugs whose development is costlier and more uncertain than other drugs if potential returns are subject to bureaucratic caprice.
Pharmaceuticals have been the most important type of medical-care contributing to U.S. life-expectancy improvements over the past 30 years. Innovative new drugs turned HIV into a chronic disease, cured Hepatitis C, and extended cancer patients’ lives. The IRA threatens to end that progress. Congress should resist the president’s suggestion to go even deeper with an already-destructive law.
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