Democrats are looking for ways to fund their $ 3.5 trillion reconciliation bill, and one of the plans is to control prescription drug prices. If adopted, these policies would be of great harm to patients. Far from saving money, price controls would make better health more expensive.
White House Biden has proposed requiring Medicare to “negotiate” drug prices. Businesses face a sales tax of up to 95% if they don’t cede the government price, which means it’s not a negotiation but a demand. Pharmaceutical companies should offer the same rates to commercial insurers. The plan would also tie price increases to inflation, which will only translate into higher prices for drugs at launch.
These controls would increase, not lower, the price Americans pay for better health. Price controls will hurt innovation, and new drugs are a form of price reduction. A new drug, even an expensive one, offers society something that was not previously available. Until recently, a person living with HIV, breast cancer or hepatitis C couldn’t afford a longer life. But then came innovative drugs. Covid-19 vaccines have also reduced the cost of preventing serious illness and infection. Generics, which represent around 95% of prescriptions, help bring down prices but are not possible without the price reductions of this first innovative drug.
Unfortunately, the debate is informed by a flawed analysis by the Congressional Budget Office. The CBO says price controls will reduce prescription drug prices by 57% to 75% among the 250 most expensive drugs that form the basis of US profits. Somehow, although the United States is home to around 70% of global drug profits, the supply of new drugs will only be reduced by 5% from 2021 to 2039, a loss of just two drugs. per year.
CBO minimizes adverse effects on innovation, but the entire supply chain that funds medical R&D relies on rate of return assessments determined by future profits. An analysis I published this week found the effect on R&D 10 times, a loss of up to 340 drugs over the same period.
The White House also says price controls will not hinder innovation because it only governs top-selling drugs. But the occasional blockbuster funds about 90% of pipeline drugs that never pass the Food and Drug Administration review. The CBO even recognizes that only the top 7% rich in Medicare drugs generate profits in the United States. Targeting financially successful drugs could make large segments of the development portfolio unprofitable, even if these drugs are unaffected by price controls.
Another theme of the White House proposal is to increase payments for drugs based on their value to patients. That sounds good, until you realize that the bureaucrats, not the market, will determine this value. Bureaucrats often do not count the significant pharmaceutical benefits, such as the enormous value of economic activity that picked up after Covid-19 vaccines became available.
On the bright side, the Biden plan encourages the FDA to become more efficient at approving generics and biosimilar drugs. The Trump administration’s work to speed up generic approvals led to the first drug price drop in 46 years in 2018. Operation Warp Speed for Covid-19 vaccines has made the public very aware of the value of increased flexibility to the FDA, which often moves just as slow.
Other countries have imposed these price controls and benefit from American innovation for free. Better health will become much more expensive if America takes the same path.
Mr. Philipson is an economist at the University of Chicago. He was a member of the Presidential Council of Economic Advisers, 2017-20, and its interim president, 2019-20.
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Published in the print edition of September 16, 2021.