By Tomas J. Philipson
Democrats are looking for ways to finance their $3.5 trillion reconciliation bill, and one plan is to put price controls on prescription drugs. If enacted, these policies would harm patients enormously. Far from saving money, price controls would make better health more expensive.
The Biden White House has proposed requiring Medicare to “negotiate” drug prices. Companies face a tax as high as 95% on sales if they don’t concede to the government price, meaning this isn’t a negotiation but a demand. Drug companies would have to offer commercial insurers the same rates. The plan would also tie price increases to inflation, which will only translate to higher prices for drugs at launch.
These controls would raise, not lower, the price Americans pay for better health. Price controls will harm innovation, and new drugs are a form of reducing prices. A new drug, even an expensive one, offers society something that wasn’t previously available. Until recently, someone with HIV, breast cancer or hepatitis C couldn’t buy a longer life at any price. But then came innovative drugs. Covid-19 vaccines similarly slashed the cost of preventing infection and serious illness. Generics, which make up about 95% of prescriptions, help push prices down but aren’t possible without the price reductions from that first innovative drug.
Unfortunately, the debate is being informed by erroneous Congressional Budget Office analysis. CBO says that price controls will cut prescription drug prices 57% to 75% among the most expensive 250 drugs that form the base of U.S. profits. Somehow, though the U.S. is home to roughly 70% of the world’s drug profits, the supply of new drugs will only be reduced by 5% from 2021 to 2039, a loss of only two drugs a year.
The CBO minimizes the harmful effects on innovation, but the entire supply chain that funds medical R&D relies on rate-of-return assessments driven by future earnings. An analysis I released this week finds 10 times the effect on R&D, a loss of up to some 340 drugs over the same period.
The White House also claims that price controls won’t hamstring innovation because they only govern top-selling drugs. But the occasional blockbuster funds the roughly 90% of pipeline drugs that never pass Food and Drug Administration review. CBO even acknowledges that only the top 7% of Medicare drugs drive U.S. profits. Targeting financially successful drugs could make large segments of the development portfolio unprofitable, even if such drugs aren’t affected by price controls.
Another theme of the White House’s proposal is to increase payments for drugs based on their value to patients. This sounds nice—until you realize that bureaucrats, not the market, will determine that value. The bureaucrats often don’t count important drug benefits, such as the enormous value of the economic activity that resumed 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 decline in drug prices in 46 years in 2018. Operation Warp Speed for Covid-19 vaccines made the public highly aware of the value of increased flexibility at the FDA, which often moves too slow.
Other countries have imposed these price controls and take a free ride on U.S. innovation. Better health will become far more expensive if America goes down the same path.
Mr. Philipson is an economist at the University of Chicago. He was a member of the president’s Council of Economic Advisers, 2017-20, and its acting chairman, 2019-20.
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