Drug Price Controls Underperform, Unworkable

Medicare this month announced the end of its first round of "negotiations" over the prices of 10 prescription drugs covered under the Part D benefit as authorized by the Inflation Reduction Act. The results the Biden administration has delivered are a lot less dramatic than they're letting on.

According to the White House, the program will save the federal government an estimated $6 billion in 2026, the first year the new prices will be in effect, while reducing costs for seniors by $1.5 billion.

Those figures might seem impressive. But they are almost certainly inflated. In fact, it's remarkable how little immediate effect on drug prices the program will deliver.

In order to arrive at those numbers, the Centers for Medicare and Medicaid Services assume that every Part D beneficiary is enrolled in the "standard benefit." But many seniors have far more generous coverage. So the $1.5 billion figure is fiction from the jump.

Further, to yield its headline numbers, the Biden administration is comparing the "negotiated" prices it has dictated to each drug's undiscounted list price.

A drug's list price, however, doesn't account for the substantial price reductions and rebates that drug manufacturers routinely provide to pharmacy benefit managers and the health plans that hire them. This discounted "net price" tells us what payers actually pay — and drugmakers actually receive — for drugs.

For the 10 drugs selected for this first round of price controls, the median private manufacturer rebate was $315, according to an analysis by former Congressional Budget Office director Douglas Holtz-Eakin.

By comparison, the median price reduction secured by the new federal price control regime was just $101.

In other words, most of the price cuts the government is taking credit for would have happened without this sweeping new policy. The real value of the government's price reductions is quite meager. According to the Cato Institute's Michael Cannon, total savings from this round of price controls amounts to a mere 1% of Medicare's total budget.

Yes, the Biden administration might have driven drug prices down very slightly at the margins. That's what price controls do.

But it has achieved those savings in the most destructive way imaginable — namely, by knee-capping the incentive for investors to fund research and development of the next generation of therapies.

It's because of America's market-based system of prescription drug pricing that we continue to lead the world in the invention of new medicines. Our nation has achieved this dominance by avoiding the kinds of price controls imposed in other countries around the world, including the United Kingdom, France, Germany and Canada.

After all, it generally takes over $2.5 billion and more than a decade to bring a drug candidate from the lab, through the Food and Drug Administration's regulatory approval process, and to patients. Roughly one in 10 drug candidates makes it through the approval process.

By giving the government the power to dictate — not negotiate — drug prices, the IRA has set the stage for a slow-down in medical discovery that no patient should welcome.

A recent analysis from the research firm Vital Transformation projects that the IRA's new price control scheme could deny the world 139 new medicines in the next decade. University of Chicago economist Tomas Philipson reached a similar conclusion, estimating that drug price controls will reduce the number of new medicines by 135 by the year 2039.

These troubling scenarios are already in motion. Since the IRA's passage in August 2022, many pharmaceutical companies have halted work on drug candidates because the looming threat of price controls has made continued research into them uneconomical.

Progressives have largely downplayed these very real costs to patients. If given the choice between a vibrant drug market that encourages and rewards the invention of medicines that allow patients to live longer, healthier lives and a very slight reduction in what the government pays for drugs, most Americans would choose the former.

Unfortunately, the Biden administration has chosen the latter. Democratic presidential nominee Kamala Harris has promised to continue and expand this price control program. Patients today — and tomorrow — will pay the price, in the form of fewer effective therapies for devastating diseases.