Inflation Reduction Act Has Brought Higher Drug Prices
Despite the Inflation Reduction Act’s provisions supposedly aimed to lower drug prices, a new report suggests that drug price increases are only growing, and the new law is likely playing a role.
A report from 46brooklyn found that there were 1,425 drug list price increases, a 17% increase over the 1,219 price increases in 2021. The report’s authors state that “we are increasingly noticing that the pace of increases appear to be accelerating (at least in relation to prior years).” The price increase is about 6.4% in 2022 compared to 4.9% in 2021.
In addition to the list price increases, Reuters reports that new medicines are reaching record-high prices. They found that the annual median price for a new drug in 2022 was $222,000, up from $180,000 in 2021. Antonio Ciaccia, president of Three Axis Advisors, told Reuters that this entire phenomenon is connected to the Inflation Reduction Act. “Drug makers have to take a harder look at calibrating those launch prices out of the gate ... so they don't box themselves into the point where in the future, they can't price increase their way back into profitability.”
What could stop these companies from pricing their drugs at a profitable level? The Inflation Reduction Act. Beginning this Fall, the legislation will require drug manufacturers to go through a “negotiation” process with the Centers for Medicare and Medicaid Services (CMS) when setting their prices or else face massive excise tax penalties—which would directly raise costs on consumers. This negotiation process allows the government to impose price controls on drugs. Lest there be any confusion, the bill explicitly establishes a “maximum fair price” for drugs. In any “negotiation,” the government is required to allow prices no higher than this maximum price. This is, in other words, a price cap.
Already we are seeing that, instead of lowering prices, the prospect of future price controls is encouraging manufacturers to set high prices and raise prices and keep them high, lest the forthcoming price controls turn their drugs unprofitable. With these new prices, manufacturers are seeking to game the system by raising prices in the meantime or raising their launch prices.
None of this should be shocking. At the time of its passage, while supporters of the bill touted its goal of lowering drug prices, people on both sides of the aisle saw that the impending price control could create perverse incentives for higher prices in the short term before they take effect.
In the long run, the results could be devastating. The Joint Economic Committee released a September report that concluded the overall effect of the drug pricing provisions in the Inflation Reduction Act would be to decrease research and development spending in healthcare. This “loss in research and development expenditures will likely be substantial, leading to estimates of 15 fewer pharmaceutical drugs over the next 30 years, a significant harm to the health of future Americans” and leading to “the loss of between 6 million and 19 million life-years over the next 30 years.”
Yale Economist Fiona Scott Morton notes that various government schemes dating back to the 1990s to lower prices for programs, such as Medicare and Medicaid, have led to higher prices for everyone. For example, after a rule requiring drug companies “to charge Medicaid the lowest price given to any other customer, pharmaceutical firms reduced discounts. The legislation increased drug expenditures for many private buyers as drug manufacturers tried to raise prices on government sales.” Rules aimed to help decrease the costs to government programs end up shifting the burden onto average Americans.
The lesson from history being repeated is that price controls simply do not work. As lawmakers continue looking for solutions to bring down inflation and high prices within medicine, they should turn to market competition instead of government manipulation.
One factor behind the high costs in medicine is the expensive and lengthy approval process. Since the United States does not have a reciprocity agreement with the European Union and other developed nations worldwide, even if they are already approved internationally, pharmaceutical companies must delay U.S. rollouts until they go through the regulatory process again here. These massive barriers to entry slow the development of new treatments, hinder market competition, and raise prices. This was seen this past summer during the baby formula shortage as internationally approved formula was available, but the FDA prevented and delayed it from coming into the U.S. If the goal is lowering drug prices, FDA reform should be a topic of discussion.
These high prices that consumers are seeing result from government intervention and artificially created barriers in the market. Price controls of the Inflation Reduction Act are clearly working against the goals of expanding access to healthcare treatments and reducing costs. Let’s hope that Congress has learned its lesson and turns to address the real root of the problem.
Dr. Mary Tipton, MD is an Internal Medicine Specialist in South Jordan, Utah
