Pharmaceutical Price Controls
Impact of Drug Pricing Legislation on Access to Life-Enhancing Drugs
High and rising health care costs pose a perennial problem in America. Polling by Gallup consistently shows Americans name health care costs as one of the most important family financial problems. As health care consumes a greater share of the economy, rising health care costs also consistently pose problems for state and federal budgets.
Lately, the cost control solutions offered by leaders in Washington have emphasized policies to bring down prescription drug prices. The Trump administration’s health care agenda focused heavily on lowering drug prices. More recently, Congress and the Biden administration’s Build Back Better agenda relies on lowering drug prices to reduce federal Medicare spending and help fund the rest of the agenda. While the overall Build Back Better agenda has stalled, the Biden administration continues to prioritize lowering drug prices. In his State of the Union address, President Biden led off his plan to fight inflation with a call to cut drug prices, including a call to let Medicare negotiate lower prices.
The Build Back Better approach to lowering drug prices focuses on creating a federal system of price setting and market limitations in the United States that applies to both the Medicare program as well as the private market. Specifically, these policies would allow Medicare to negotiate and effectively set prices for certain high-cost drugs, require drug manufacturers to pay the federal government rebates when price increases exceed inflation, and redesign the Medicare Part D prescription drug benefit to reduce cost-sharing.
There are clear tradeoffs to an approach that relies on price setting and market limitations to lower drug prices. While lower prices will lower health care spending, they are also expected to make investments in research and development (R&D) less attractive and reduce the development of innovative new drugs. It would also negatively impact the U.S. drug industry’s global leadership position, giving China the opportunity to control a greater share of the market and undermine U.S. foreign policy interests.
This report examines these tradeoffs and concludes, overall, the loss of new, life-enhancing drugs and the negative impact on U.S. interests outweigh the possible benefits of Build Back Better’s drug pricing policies. This conclusion draws from the following key findings:
- The authority to “negotiate” drug prices in Build Back Better is in fact the authority to set and control prices. While Build Back Better authorizes the Secretary of the Department of Health and Human Services (HHS) to negotiate drug prices, the bill also includes a punitive excise tax escalating up to 95 percent of the total sales of the drugs subject to “negotiation” if the manufacturer refuses to negotiate or fails to agree to a price. Combined with other federal taxes, this excise tax would likely result in a loss. As such, this tax creates an offer that cannot be refused and, therefore, cannot reasonably be construed as a negotiation. Instead, the negotiation provision functions as a price control.
- Build Back Better price controls will make R&D investments less attractive and, as a result, reduce the number of new drugs. By design, Build Back Better’s price controls—both the HHS price setting and inflation rebates— will reduce drug manufacturers’ expected lifetime revenue from a new drug. Lower revenues will reduce the expected return on R&D investments, which will make the investments less attractive and, in turn, lower spending on R&D. Less spending on R&D will naturally result in the development of fewer new drugs.
Estimates on how many fewer new drugs vary widely. On the low end, the Congressional Budget Office (CBO) estimates the latest Build Back Better legislation will result in just one less new drug over the first decade, four fewer over the next decade, and another five fewer during the decade after that. University of Chicago economists estimate a much larger reduction amounting to 107 fewer new drugs over the first 20 years.
- Fewer new drugs will undoubtedly harm global health and well-being. Overall, lower prices can improve health to some degree by increasing the use of existing drugs while, in the long run, fewer new drugs will lower the quality of life and life expectancy for people who would later benefit from new drugs. However, under the structure of Build Back Better’s price controls, price reductions are not expected to lead to a measurable increase in utilization. The CBO assumes that low cost-sharing requirements that insulate people from drug prices will mean most of the savings accrue to the federal taxpayer and, therefore, will have only limited impact on individual utilization. Thus, on net, the negative health impacts from fewer new drugs which is fully borne by consumers can be expected to far outweigh any health benefits from increased utilization.
- A focus on prescription drug prices is not an effective strategy to control the overall cost of health care because drug prices are not responsible for the recent growth in health care costs. A review of the most recent 10 years of National Health Expenditure (NHE) data from the Centers for Medicare & Medicaid Services (CMS) for 2010 to 2020 shows retail prescription drug expenditures represent only a small portion of the recent rise in health care costs. Over this decade, prescription drug expenditures grew at a 3.2 percent average annual rate which is substantially less than the 4.8 percent average annual growth for NHE overall. NHE data suggests utilization increases, not higher drug prices, account for about 60 percent of this growth. This reflects the fact that the NHE’s retail drug price index began to decline in 2018 for the first time since 1973 and have now declined for three straight years.
- Price Controls on prescription drugs will weaken the U.S. biopharma industry’s global leadership. International data on new drug development and R&D expenditures clearly show how Europe and the U.S. traded global leadership positions over the course of three decades. In the early nineties, the number of new chemical and biological drug entities developed in Europe were substantially higher in both Europe and Japan compared to the U.S. By contrast, in the recent five-year period covering 2016 to 2020, the U.S. developed more new drug entities than Europe and Japan combined. Research shows price controls do impact decisions on where biopharma companies choose to locate. Therefore, by adopting price controls in line with other countries, the U.S. would be giving up this competitive advantage.
- China is well positioned to take advantage and take market share if price controls weaken the U.S. position in the global biopharma market. The U.S. has both strong economic and national security interests in maintaining global leadership in the biopharma and other advanced industries, especially in relation to China and their growing authoritarian influence. Toward that goal, the U.S. Senate passed the Endless Frontier Act on a bipartisan basis in 2021, which included “biotechnology, medical technology, genomics, and synthetic biology” in the initial list of key technology focus areas. Yet, while the Endless Frontier Act works to strengthen the U.S. Biopharma industry’s global leadership position, Build Back Better would weaken it and accelerate industry movement to other growth markets. Being one of the leading growth markets, China is possibly the best positioned to take market share from the U.S. for several reasons.
While every country relies on public investments in biopharma R&D, China’s communist government has more power to increase these public investments to give the industry an edge over other countries if they make gaining market share a priority. This is exactly what China has done in the field of artificial intelligence. Another factor giving China an advantage is the country’s growing share of the pharmaceutical market. Medicine spending in China grew from $68 billion in 2011 to $169 billion in 2021, which accounts for 11.9 percent of global spending. China has also proven a willingness to steal intellectual property, which gives it an ongoing advantage over other countries.
- Larger market share will give China diplomatic leverage and may restrict U.S. access to new drugs. The substantial investments China made in developing COVID-19 vaccines made China the world’s top vaccine exporter in 2021. China successfully used access to the vaccine to push Nicaragua to sever ties with Taiwan. These actions demonstrate China’s willingness to use access to lifesaving and life-enhancing drugs to achieve diplomatic goals. Greater Chinese market share resulting from U.S. price controls and, consequently, greater dependence on China for drugs may also restrict access to new drugs. The need to protect U.S. access to critical resources like steel and energy has long influenced industrial policy. Access to drugs and other advanced technologies is likewise important to consider.
Considering lower drug prices will not lead to appreciably higher drug utilization, there’s little health benefit to Build Back Better and the net impact on global health and well-being will almost certainly be negative and substantially so. Fewer new drugs and, in particular, fewer new drugs to treat the sickest populations will result in a lower quality of life and a lower life expectancy for people in the U.S. and worldwide. Access for people in the U.S. may be further restricted if other countries like China control a greater share of new drugs. The impact of allowing China to gain a greater share of new drugs will also undermine America’s national interests, which deserves more attention. These considerations strongly weigh against adopting the type of price controls included in the Build Back Better agenda.