Economists' Warnings on Drug Price Controls Should Sink IRA

In the short time since its unveiling after secret negotiations, the so-called Inflation Reduction Act (IRA) has earned cheers, jeers, and everything in between from the economics community. Supporters tout an open letter to lawmakers from 126 economists, while more recently opponents fired back with a letter of their own – from more than 230 economists. The latter group noted that the IRA “would create immediate inflationary pressures by boosting demand, while the supply-side tax hikes would constrain supply by discouraging investment and draining the private sector of much-needed resources.”

For their part, institutions ranging from the Congressional Budget Office to the Penn Wharton Budget Model have modeled the impacts of the IRA and determined it will have a minimal impact on inflation, despite the legislation’s clever name.

Yet policymakers would do well to remember one particular aspect of the IRA that has long drawn concern from economists: government imposed price controls, in this case on prescription drugs.

Borrowing from previous schemes authored by congressional Democrats, the IRA mandates that Medicare begin “negotiations” in 2026 with pharmaceutical manufacturers to lower the price of top prescription drugs. Private sector providers who refuse to submit to the government’s price edicts would eventually face a 95 percent excise tax on their products. Manufacturers would also be penalized for raising prices faster than inflation, and be required to provide “rebates” (forced payments) to the government.

This one part of the bill, if allowed to stand, could have pernicious effects on patients and taxpayers for years, even decades, to come. Taxpayers often benefit from the development of breakthrough drugs because they reduce more expensive therapies – such as surgeries and long hospital stays – whose financial burdens government health programs would otherwise carry.

More fundamentally, however, economists of many ideologies have long observed the fact that when the state imposes an artificial price control on a good or service, scarcity and other adverse conditions are often the result. In 2018, NTU led an open letter to public officials signed by more than 150 economists warning of this problem when the Trump Administration was considering an executive order incorporating a foreign price index for certain physician administered drugs under Medicare Part B. While this proposal differed in many respects from the IRA’s provisions, the operational concept – a top-down attempt by government to put a lid on prices – is the same. Thus, the economists’ admonition then is just as relevant now:

“History has shown that price controls on any commodity produce unintended but consistently detrimental effects.  … [P]rice controls can lead to a reduction in patient access to certain drugs, less investment in the research and development of new drugs, and cost-shifting that raises the prices of other therapeutics. Ultimately, patients will suffer as cures are delayed or entirely undeveloped, while taxpayers will be denied potential savings from drugs that could obviate more expensive treatments in government healthcare programs, and the investment of capital in development of new medicines.”

The Congressional Budget Office has just today identified another impact from the IRA that seems counterintuitive but shouldn’t: higher launch prices for new drugs.  The agency noted, quite logically, that under the inflation penalty, “manufacturers would have an incentive to launch new drugs at a higher price to offset slower growth in prices over time.” Based on an analysis last year that NTU covered in-depth, CBO would also likely agree about the adverse impact the IRA would have on the frequency and development timeline of those newly launched drugs.

NTU has identified many better ways to address health care system reform and the role of prescription drugs than IRA’s price controls. Time is running short for Congress to heed the advice of economists – not to mention the concerns of taxpayers and patients – about how this legislation will upset a pharmaceutical care system that balances accessibility and affordability so elegantly.