‘Killing Cures’: Biden Price Controls Suffocate Medical Innovation
With “Bidenomics” proving to be a lame racehorse, President Joe Biden has instead placed his election bets on a policy prescription guaranteed to win him favor among freedom-loving Americans: socialized medicine. Biden stumped Wednesday with his 2020 primary rival, Senator Bernie Sanders (I-Vt.), to tout his administration’s health care policy accomplishments, particularly through the Inflation Reduction Act.
There’s only one problem. “The Inflation Reduction Act (IRA) … is the worst legislation that I have ever seen, at least the prescription drug portion of it is,” said Rep. Buddy Carter (R-Ga.), a 40-year pharmacy veteran, on “Washington Watch.”
The IRA controls drug prices by terrorizing drug companies. It “requires the Centers for Medicare and Medicaid Services to ‘negotiate’ prices for the top-spending Medicare drugs,” wrote The Wall Street Journal (WSJ) editors, setting “the drug price ceiling at between 25% and 60% of its list price, with no price floor,” beginning nine years after market entry (patents only last for 14 years).
For enforcement, “Drug makers that don’t participate or reject the government’s price will incur a crippling daily excise tax that starts at 186% and eventually climbs to 1,900% of the drug’s daily revenues. This is extortion, not a negotiation,” exclaimed the WSJ editors. Big Pharma and the U.S. Chamber of Commerce are challenging the IRA’s constitutionality, WSJ concluded, arguing that “the sham negotiations violate the Eighth and Fifth Amendment prohibitions against excessive fines and the taking of private property without just compensation.”
(After backing progressive politicians for their social agenda, these big businesses are now getting a dose of their own medicine. Those who climb in bed with a donkey should prepare to get kicked.)
It doesn’t take a Ph.D. in economics to predict that such an absurd price suppression scheme would result in unintended negative outcomes. “What it is doing is killing cures,” Carter responded. “Already, drug companies have stopped research and development (R&D) and drugs that were in the pipeline because of this piece of legislation.”
Pharmaceutical R&D is a time-consuming, costly process. Among the costly barriers to entry, drug companies need high-tech equipment, ingredients that might be scarce, hazardous, or unstable, high-quality laboratories with adequate safety controls, and staff possessed of both chemical expertise and creative genius. They must then discover or create a new drug, test its efficacy and safety, and have it fully approved by the U.S. Food and Drug Administration (FDA). That’s even harder than it sounds, and only about 10% of drugs make it all the way from Phase 1 trials to approval. The gargantuan hurdles pharmaceutical R&D faces led one writer to summarize, “It takes 10 to 15 years and around $1 billion to develop one successful drug.”
To make it worthwhile to expend such colossal investment and assume such enormous risk, pharmaceutical companies need to rely on the opportunity to derive profits from their successful drugs sufficient to cover their R&D investments.
“The drug companies need to do a better job with their pricing. There’s no question about that,” Carter conceded, “but that’s not where the problem is.” Carter argued there are other policy changes at the federal government’s disposal, which could lower drug prices without distorting incentives to innovate. For instance, he urged, Congress should break up the “vertical integration” in payment chains, which contribute to higher prices and do away with pharmacy benefit managers.
“Keeping people well and finding solutions to these problems in the end will save us money,” Carter continued. “The more people we can keep off of dialysis, the more people we can keep from having to have insulin, the more we can save. … If we can find a cure for Alzheimer’s, then we can not only save a tremendous amount of money, we can also save the wear-and-tear, if you will, that it will have on caregivers.”
The U.S. government has long recognized the usefulness of patents and copyrights to promote innovation. In Article I, Section 8 of the Constitution, America’s Framers gave Congress the power “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The pharmaceutical industry demonstrates this argument on steroids due to the astronomical investment costs associated with producing a marketable, profitable, new drug.
“America is the greatest innovator in the world. We have had more innovation in America with drugs than any other country,” Carter insisted. During his 40 years as a pharmacist, he added, “I saw nothing short of cures and nothing short of miracles [produced] through research and development.”
Now the entire innovation system has a pillow held firmly over its face. By severely curtailing potential profits, argued the WSJ editors, the IRA discourages companies from studying new applications for existing drugs, developing treatments for rarer maladies, or developing generics to compete with no-longer-highly-priced name brands. They further argued that the IRA creates “incentives to launch drugs at higher prices,” before Medicaid and Medicare knock those prices to the floor, and to “raise prices for privately insured patients to compensate for the Medicare cuts.”
This innovation loss can be quantifiable. In a 2021 working paper, University of Chicago researchers analyzed the effect of a different bill, then-Speaker Nancy Pelosi’s (D) “Lower Drug Costs Now Act,” based on a widely recognized estimate that a “1% reduction in revenue” would lead to a “1.5% reduction in R&D activity.” When applied to the IRA, that same formula predicted a decrease in R&D spending of “about 18.5 percent, amounting to $663 billion” less R&D by 2039, and leading to the development of “135 fewer new drugs.”
In a 2023 estimate, separate University of Chicago economists “conservatively” estimated “a reduction in R&D investment of almost 12.3%, or $232.1 billion over 20 years.” They estimated this would not only result in 79 fewer new drugs, but also 109 fewer post-approval indications for these drugs, totaling 188 fewer total treatments. “This forgone innovation is expected to lead to 116.0 million life years lost due to the missed opportunities to improve health,” they found. Without assuming malice, these are hardly consequences the Biden administration was hoping to achieve with their drug pricing control scheme.
There isn’t much positive to say about the Inflation Reduction Act. It didn’t even reduce inflation, according to economists at the same University of Pennsylvania that opened a center with Joe Biden. It stoked inflation by subsidizing un-economic “green” energy policies, and heightened fears of tax-fare against law-abiding citizens by preparing the ground for hiring thousands more IRS agents. If there is a silver lining, perhaps it’s this: while Biden is banging the lectern about predatory drug pricing, for once he isn’t talking about abortion.
Joshua Arnold is a senior writer at The Washington Stand.