The High Cost of Drug Price Controls

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The debate over expanding government control of our health sector should have ended during the Covid-19 pandemic:

  • Where there have been failures in responding to the crisis, it has been a failure of big government—such as the Center for Disease Control’s arrogant and clumsy insistence on controlling early development of testing that delayed the U.S. response and surely cost lives. Or the failure to protect those most at risk, especially seniors in nursing homes. Or CDC’s decades-long refusal to develop a modern data tracking system.
  • Where there have been successes—such as producing and delivering medical supplies and conducting research to develop vaccines at warp speed—it is the private sector that has shown it can deliver.

But House Democrats on Thursday introduced a bill that would impose huge financial penalties on the pharmaceutical industry, drying up resources needed for the very research that is saving lives today. 

H.R. 3 would impose price controls on U.S. drug sales based upon prices in certain European countries—countries that have decimated their pharmaceutical research capacity and that deny their citizens access to the newest, life-saving drugs. U.S. patients have access to 90% of the newest drugs; in France, patients can access fewer than half and only 14% in Spain and Greece, for example.

The proposed Biden plan would set an “upper price limit” for cutting-edge medicines based on prices set by foreign governments. Washington would “negotiate” prices with U.S. drug companies and determine the “fair price” based upon these international reference prices.

If companies refuse, they would face a 95% excise tax on revenues from sales of the drug in the previous year.  This is confiscatory and punitive.

The result for Americans would be devastating. More than 100 fewer new drugs would be produced over the next decade.

In fairness, international reference pricing is based upon a plan offered by the Trump administration, which conservatives like us also vociferously opposed, with Galen Senior Fellow Doug Badger’s paper explaining the consequences in powerful detail. 

Drug prices continue to be a huge political issue, and Democrats are pushing this bad idea because the Congressional Budget Office has said it also would reduce drug spending for Medicare by $345 billion.  They want to spend those savings on other new programs. But seniors need to understand the consequences.  Now.

Badger wrote, in “Pharmaceutical Innovation is Winning the War on COVID-19.  Biden Shouldn’t Disarm,” that, December 2019, “the Council of Economic Advisors estimated this would reduce the pharmaceutical industry’s revenue by anywhere from $500 billion to $1 trillion over the next decade, resulting in a massive reduction in research budgets and as many as 100 fewer products over that period,” Badger writes.

“According to the CEA, Americans would be less healthy and less economically productive as a result…imposing a cost to society 10 to 30 times the federal savings.”

Imagine the cost of years of delay in producing vaccines and countless lives that would be lost without a vibrant, research-based pharmaceutical industry ready to respond.  “Oh, government researchers would fill the gap,” some say.  Absolutely not so.  The vaccines going into hundreds of millions of arms over the last several months are based upon decades of thankless research in pharmaceutical company labs. “The proposed price controls would choke off tens of billions of dollars of capital investments in new treatments, vaccines, and cures,” Badger writes.

Republicans are offering an alternative, the “Lower Costs, More Cures Act.”

Highlights:  

  • It would cap out-of-pocket spending for seniors in Medicare Part D at no more than $3,100 a year
  • Allow Part D cost sharing to be paid over time
  • Allow HSAs to cover drugs before the deductible
  • Increase price transparency that now allows insider companies to draw down more than $48 billion throughout the supply chain while producing no treatments or cures
  • Require 340B discounts to be paid directly to consumers

Innovation and a healthy biopharmaceutical sector allowed the U.S. to lead in producing vaccines in an astonishingly short time.  In the next pandemic, will we wonder why it takes years rather than months for a treatment, vaccine, or cure?  Whether H.R. 3 passes will give us the answer.

Seniors with chronic conditions, those with rare diseases, and others seeking better treatments will be hit the hardest. A new study by the Council of State Bioscience Associations and Vital Transformations says the Biden plan would reduce by more than 90% the number of medicines developed by small and emerging biotech companies, resulting in 61 fewer medicines over 10 years. These small companies—think Moderna—are the cradle of innovation. 

H.R. 3 likely will pass the House again, as it did in the last Congress.  All eyes will then be on the 50-50 Senate to see if reason or politics will prevail.

Grace-Marie Turner is president of the Galen Institute that develops health policy solutions that support innovation and doctor-patient control over health care decisions.

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