By Tom Price
Price controls never work, yet government officials find them irresistible. They ignore mountains of evidence about their consequences, so they can tell their constituents they are making things more affordable.
The newest edition in this ongoing saga is the prescription drug price control provision in the Inflation Reduction Act, which President Biden signed into law on Tuesday. The legislation allows the government for the first time to fix prices on some prescription drugs in Medicare. This price-setting measure will lead to fewer treatments and potentially even higher healthcare costs.
The economic law of unintended consequences states that whenever governments disrupt natural market forces, negative results ensue. You can’t dam a river without generating spillover and impacting habitats downstream. Price controls, no matter the industry — from energy to real estate to prescription drugs, scare away needed investments and ultimately hurt consumers.
For instance, rent control reduces affordable housing options — the exact opposite of its goal — by chilling developer investment and disincentivizing people from renting out their extra space. Capital is flighty and demands a return.
The IRA’s price controls on prescription drugs threaten a dynamic industry responsible for around half the increase in U.S. life expectancy over the past 30 years. They effectively transfer nearly $300 billion from the productive pharmaceutical industry to the unproductive green energy complex.
This wealth transfer will meaningfully reduce the nearly $100 billion, or about 28% of revenues, drugmakers spend yearly on research and development.
The nonpartisan Congressional Budget Office projects this bill will result in 15 fewer medications arriving on the market. But this is almost certainly an underestimate. “I would be shocked if the impact of this bill doesn’t result in 15 fewer medicines from Eli Lilly and Company alone,” said Eli Lilly CEO David Ricks. “Right now, 40% of our portfolio are small molecules. We’ll need to reevaluate every single one of those projects for viability.”
Researchers at the University of Chicago estimate the legislation will lead to 135 fewer drugs and 331.5 million life years lost. According to one consulting firm, the 12 drug companies responsible for the 20 medications likely to be subject to price controls will lose more than $80 billion of revenues as a result of this legislation.
President Biden and Congressional Democrats claim these prescription drug price controls are needed to make medicines more affordable for seniors. But this price-setting may actually make their healthcare more expensive by reducing treatments that can keep them out of expensive hospitals.
Medicines only account for 12% of U.S. healthcare spending, but they save the system far more in reduced hospitalizations. Consider how the recent Hepatitis C cure has prevented thousands of enormously expensive liver transplants. Or how Covid-19 vaccines prevented hundreds of thousands of extended hospitalizations.
To the extent price controls impede new medications that keep patients out of expensive hospitals, they grow rather than reduce health expenditures.
Medicare price controls may also raise pharmaceutical costs for other patients. Drug companies will likely follow the same playbook as hospitals, which overcharge commercial patients to make up for artificially low Medicare prices. Ordinary patients in commercial markets will get hit with the price control spillover.
The Inflation Reduction Act’s prescription drug price controls impose real risks in terms of innovation and costs in return for little-to-no reward. They will result in fewer cures and treatments for rare diseases you’ve never heard of. They will set back progress in the fight against Alzheimer’s, Parkinson’s, and cancer. And they will likely raise medication costs for middle-class workers.
Perhaps the ultimate price control unintended consequence: They will slow vaccine development when the next pandemic comes.
Tom Price, a former secretary of Health and Human Services and a former member of Congress, is a senior healthcare policy fellow at the Job Creators Network.