The Biden administration's "Comprehensive Plan for Addressing High Drug Prices," released last week, paints a vivid picture of the difficulties patients face affording their medicines. "Americans pay too much for prescription drugs," the report notes. "Many Americans do not take medications as prescribed because of their cost."
How does the administration intend to ease their financial burden? By calling on Congress to give the federal government the ability to essentially dictate drug prices.
Lowering drug prices by fiat may be popular. But it would represent an almost unprecedented intrusion by the government into the economy. And it would serve to enrich private insurance companies even as it deprived current and future patients of innovative new therapies.
The Biden administration's plan doesn't include the words "price controls." It calls them "negotiations." The administration implores Congress to permit the Secretary of Health and Human Services to negotiate the prices of drugs dispensed through Medicare Parts B and D directly with manufacturers.
Drug companies can't "negotiate" on equal footing with the federal government. The feds have the market and regulatory power to essentially dictate what they'll pay. That's why experts estimate the government would save billions of dollars on prescription drugs by "negotiating."
The administration's plan goes further than just decreeing a good deal for the government. It would also let private health plans pay the same prices as the government.
These price reductions wouldn't necessarily help patients afford their medicines. The only group who wouldn't have access to these new government-mandated prices would be individuals paying out-of-pocket for drugs.
In other words, Medicare and the insurance industry are the ones who'd benefit most from these price controls.
But won't insurers pass on the savings to consumers in the form of lower premiums, deductibles, or cost-sharing? That's not guaranteed.
After all, insurers already negotiate massive price breaks from the drug industry in the form of discounts and rebates. In 2019, those concessions totaled more than $175 billion. Insurers keep a huge chunk of those savings instead of using them to make drugs more affordable for patients.
There's another false premise at the heart of the administration's drug plan -- namely, that the country is spending too much on prescription drugs.
Prescription drugs account for roughly 10% of national health spending. That's half the share we devote to physician and clinical services. Hospital care accounts for one-third of healthcare spending in this country.
In other words, trimming prescription drug spending won't actually save the U.S. healthcare system much money.
There's an argument that we should devote more of our healthcare dollars to prescription drugs. After all, they reduce overall health spending in the long run by obviating the need for costly medical procedures. A daily cholesterol-lowering statin is much cheaper than emergency cardiovascular surgery.
Perhaps the biggest bait-and-switch in the administration's plan is that it purports "to foster innovation, harness market forces, and improve the market environment."
Hardly. Its system of drug price controls would starve one of the most innovative industries in the American economy of valuable research funding. It weakens the financial incentives for investors and research firms to risk time and resources inventing new cures, treatments, and vaccines.
University of Chicago economist Tomas Philipson analyzed a similar scheme of price controls under consideration in the House of Representatives and found that it would result in up to 65 fewer new drugs this decade and up to 277 fewer new drugs next decade.
The Biden administration's prescription drug plan may deliver short-term savings for the government and the insurance industry.
But it's not clear whether current patients would save much money.
And it's certain that future patients would be deprived of cures under the scheme.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is "False Premise, False Promise: The Disastrous Reality of Medicare for All," (Encounter 2020). Follow her on Twitter @sallypipes. Read Sally Pipes' Reports — More Here.
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