The Biden administration has outlined a detailed prescription for even greater government control over Americans’ medications.
President Joe Biden unveiled the broad outlines in his March 7 State of the Union address, and the Department of Health and Human Services filled in the details in the president’s proposed $7.3 trillion fiscal year 2025 budget submission.
If Biden’s policy agenda were enacted by Congress, federal officials would extend Medicare’s current price-control regime into the private sector, affecting American citizens’ access to new drugs and breakthrough medications.
In his address to Congress, Biden declared that “Americans pay more for prescription drugs than anywhere in the world. It’s wrong, and I am ending it.”
Under the misleadingly named Inflation Reduction Act, in 2026 Medicare will fix the prices of 10 selected drugs, and the number of medications and therapies will get progressively larger after that date. But Biden made it clear—if there was any doubt—that the government’s price-control regime will be expansive.
Biden wants Medicare to be able to negotiate prices for more than 500 different drugs over the next decade, while expanding the government’s regulatory power over the private sector. Concerning the Medicare drug policy, the president claimed, “It will not only save lives, but it will also save taxpayers another $200 billion.”
Though Team Biden routinely describes the process of Medicare drug pricing as a process of “negotiation”—conjuring up the image of “give and take” of private sector contracting—nothing could be further from the truth.
Rather, Biden is reviving the oldest policy flop in economic history; namely, government price controls. Any pharmaceutical research and manufacturing company that does not agree to the terms the Medicare bureaucracy sets for the “maximum price” of a drug is subject to an extraordinarily punitive excise tax.
That’s coercion, not negotiation.
Given the long history of government price controls in various sectors of the economy, stretching back literally thousands of years, the dynamics generate inescapable consequences. So, do not expect Biden’s policy to produce results materially different.
First, following a mandatory decline in company revenues, expect a reduction in private sector investment spending in drugs and therapeutics, particularly new medications and therapies. Heavy research and development investment (between $4 billion and $10 billion) is routinely required for new medications. Such investment is also required for breakthrough vaccines.
Second, as with any government price-control regime, expect a massive cost shift from the controlled to the uncontrolled sector of the economy. If pharmaceutical research and development companies are forced to offer drugs below a market price in a huge program like Medicare, the companies will have no choice but to stop their losses by increasing their prices in the private market serving younger working families.
Price controls do not control costs, they shift costs. It has always been so.
Third, expect higher health insurance costs. While lower Medicare drug prices are expected to lower Medicare insurance premiums, expect those “savings” to result in higher premium costs outside of Medicare.
Obviously, the big insurance companies marketing to Medicare patients will come out ahead by securing lower claims costs for Medicare drugs, thus increasing their profit margins within the Medicare program. But, once again, lower health insurance premiums in Medicare, driven by government price-fixing, will incentivize private health insurers to make up the difference by raising premiums for private and employer-based health insurance.
Those big promised “savings” in Medicare will be offset by higher consumer costs outside of Medicare.
Government regulation to solve an economic problem almost always begets more government regulation to solve an unintended mess the government created.
In this case, government-generated cost-shifting of hundreds of billions of dollars (“Medicare savings”) from the public to the private sector is to be “fixed” with, yep, more regulation on the private sector.
Thus, Biden proposes to extend Medicare’s $2,000 annual cap on prescription-drug costs to the entire private sector, covering an estimated 169 million Americans.
With such a comprehensive price-control regime, those big costs do not somehow magically disappear. Rather, the costs change shape and are shifted once again to consumers in the form of shortages of price-controlled goods and services, the items no longer produced or accessible under the government’s price regulations.
On one crucial point in this Medicare drug debate, there’s no dispute: If there is a reduction in pharmaceutical R&D, there will obviously be a drop in the production and distribution of new medications or breakthrough therapies.
Both the Congressional Budget Office and independent economists agree on that point. Their differences are differences over the severity of the decline in pharmaceutical innovation. No sane official has ever suggested that a price-control strategy would increase a firm’s revenues or ensure the production and distribution of an even greater quantity of goods or services.
The CBO estimates that reduction in the availability of new therapies for patients will be 13 fewer new drugs over the next 30 years. But the CBO did not or could not provide any perspective on the costs of such a policy on public health.
We know, however, that a lack of access to drug therapy, for example, can increase utilization of non-drug medical interventions and expensive hospitalization. Serious illness and death can result.
Independent economists are not nearly as optimistic as the CBO analysts. Professor Tomas Philipson of the University of Chicago estimated that the implementation of the Inflation Reduction Act could result in a 21.7% decrease in investment spending on cancer R&D, compared with 2022 levels. Over the next 20 years, Philipson says, patients would be deprived of many advanced cancer treatments.
Thus, a price-control strategy is a supply-control strategy. In reducing the supply of the costly good or commodity, thus reducing its availability, it generates “savings” in that controlled sector of the economy. That’s why European countries, where drug price controls prevail, routinely lag behind America in pharmaceutical R&D and breakthrough medications.
Cheap drugs can be costly. For patients, that is.
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