There is a big reason why Donald J. Trump is now president with a Republican congress today: Inflation. There were other issues, including immigration, a problem with the Democratic candidate, and a shift in voter priorities, but inflation was a big issue.
Americans are tired of paying too much for everything. Yes, bacon and eggs, but big things as well like cars and medicine. The Biden administration didn’t do anything to fight inflation. In fact, the former president’s “Inflation Reduction Act” or IRA just made things much worse. It was not lost on voters that after the IRA passed, inflation increased. That signature piece of legislation by Democrats and the Biden Administration was a broken promise that made it difficult for voters to trust Democrats running for federal office.
Congress passed the IRA without a single Republican vote. The law attempted to reduce inflation the same way lawmakers did during the 1970s: by imposing price controls. Let’s have a quick history lesson of how that worked out.
The Carter era was marked by something called “stagflation.” That is, stagnant wages and inflated prices. Price controls did not work, but they did lead to shortages. That’s why the iconic image of the 1970s is people in cars in line for gas while the stations all put out signs saying, “No Gas Today.”
President Ronald Reagan entered office in 1981 and removed price controls and removed restrictions on how much companies could charge for gas. The 1980s is remembered for booming economic growth. Competition drove down the price of fuel, even as supplies soared. There was an oil glut. Trump may very well do the same thing: trigger an oil boom that slashes prices at the pump.
When it comes to drugs, the IRA created a program that is so complex it is difficult to understand or explain. To boil it down, the government will set a price willing to pay through Medicare for a drug. The drug company will either sell at that price or the government will tax the drug at 95%. Price controls, with a more polite name.
Yet just as gas price fixing reduced supplies in the 1970s, drug price fixing will reduce supplies in the 2020s. In this case, the supply of new, innovative drugs.
“One of the most alarming new trends is a noticeable reduction in R&D budgets across the industry,” American for Prosperity wrote. “Pharmaceutical companies, facing government pressure to drastically reduce prices, are scaling back their investments in new drug development – a situation experts warned would occur.”
Price controls do not just reduce investment in current drugs. They are reducing investment in innovative drugs that are known as biosimilars.
“Potential IRA price controls add an additional unknown on biosimilar manufacturers,” Forbes warned. “This unknown creates an additional risk that lowers the expected potential return from engaging in the long and costly biosimilar development process. These additional costs will dampen biosimilar competition and, consequently, reduce the potential savings.”
Misalignment between exemption from price controls for various medications and treatments will further disrupt critical development. Under the IRA, small-molecule drugs, like the pills and tablets many of us are used to taking, are subject to government-mandated prices in nine years. On the other hand, biologics, which are typically administered by a healthcare provider, get a longer exemption period—13 years. This arbitrary distinction further complicates IRA implementation and will cause a shift away from investment into small-molecule drugs. Thankfully, the Ensuring Pathways to Innovative Cures (EPIC) Act was introduced last Congress to remedy this disparity and extend the period of exemption for pills. I am hopeful it will be reintroduced and passed early this year.
Needless to say, as it stands, many companies will decide not to bother with the investment required to bring a new drug to market with these disincentives in place, and we will never get the benefit of the drugs they might have created.
In the end, prices are likely to increase anyway. “We estimate how much recently proposed US price controls on drugs in the US would raise health care spending and find that total health care spending would increase by $50.8 billion over a 20-year period,” a team at the University of Chicago wrote. It also reported that as many as 135 fewer new drugs could be produced because of the price controls.
However, these risks add up to an opportunity for the Republicans who are now running Washington.
“Every controversial social and economic malady that Democrats have pushed should be targeted by the omnibus,” advised former Hill staffer Mike Salon in the Wall Street Journal. “Trump has rescinded some of these policies through executive orders, but overturning them legislatively is a far more lasting solution.”
That is good advice. Republicans should repeal Biden’s Inflation Reduction Act, or at least pass the EPIC Act as a good start, and begin again with a law that encourages innovation and uses the market to set fair prices. That’s the way to fight inflation and help Americans.
Andrew Langer is President of the Institute for Liberty.
