Hidden Danger of Inflation "Reduction" Act: Inflated Health Costs, Reduced Cures

As consideration of the deceptively named Inflation Reduction Act (IRA) crosses the U.S. Capitol from the Senate to the House, time is running out for Congress to avoid one of the biggest unseen price tags for taxpayers: prescription drug price controls that will dampen development of lifesaving and cost-saving treatments. 

Despite being scrubbed of provisions that might run afoul of the budget reconciliation process in Congress – such as government limits on medicine prices in the private sector as opposed to public programs – what remains in the IRA is remarkably problematic. A few years after the bill’s enactment, federal officials would be empowered to “negotiate” the prices of certain top Medicare drugs, or slap a 95 percent excise tax on manufacturers who don’t submit to the government’s “offer.” Certain drug prices would be capped at an annualized level of inflation, and would be forced to “rebate” any difference above the cap (not necessarily to patients, but back to the government). 

As NTU has been pointing out for years, spending in government health programs such as Medicare and Medicaid on breakthrough drugs often can obviate more expensive surgeries and hospital stays. Both the National Bureau of Economic Research and the Congressional Budget Office have identified this phenomenon, which can translate into observable savings for taxpayers.

It only stands to reason that those savings will be diminished in the future if fewer breakthrough drugs are actually developed. And unfortunately, many authorities, including the Congressional Budget Office and the Council of Economic Advisers (under the previous administration) have confirmed a range of reduced new drug developments from prescription drug price controls similar to those under the IRA. If only budget scorekeepers could more easily measure the dollar impact of something that benefits taxpayers, but never takes place because of unwise government policy. 

Economists have also already spoken out about the perils of price controls on pharmaceuticals. As they noted a few short years ago in an open letter to policymakers on a Trump administration drug price control scheme, “History has shown that price controls on any commodity or service produce unintended but consistently detrimental effects.”

In addition to long-run lost opportunities to reduce taxpayer costs through drug innovation, one of those detrimental effects seems most ironic: reduced competition. As Quin Hillyer explained in the Washington Examiner:

“[E]ven the first ‘generic’ competitor [to a branded drug] often has initial investment costs that make it worthwhile to join the fray only if it can charge a price nearly as high as that of the original drug it wants to compete with. When government squeezes the originator, it also squeezes the possible margins for potential competitors and so on down the line. The end result will be that fewer (if any) competitors will enter the field at all …”

The IRA’s drug-pricing provisions will be extremely complex to implement and enforce as well, leading to further uncertainty in an economic sector that already must confront failure and volatility in its research and development on a daily basis. But in this case, taxpayers will be among the first to absorb the losses. The IRA sets aside a staggering $3 billion for the Centers for Medicare and Medicaid Services just to set up the government’s administrative infrastructure for the price controls. Meanwhile, as large and small investors wonder whether pharmaceuticals are a good place to put their resources going forward, profitability (and therefore tax revenues for federal, state, and local treasuries) could decline.

Taxpayers are unwilling passengers on the rudderless ship that is the IRA, and the lifeboats don’t look terribly seaworthy. The U.S. House of Representatives can still steer a more thoughtful course away from these undesirable policy destinations, but there may be only days left to do so.