For years, the rising cost of prescription drugs have been a central part of the conversation on affordable health care and both Congress and the administration have made this issue a staple of their agendas. While some solutions being advocated in Congress should be viewed as worthy pursuits, many are thinly veiled attempts to undermine the private market and replace it with government controlled health care.
Some of the most egregious proposals seek to change Medicare’s prescription drug benefit, more commonly known as Medicare Part D, and move away from Part D’s market-based approach in favor of harmful, government price regulations which would limit access to new treatments, stifle innovation, and increase the wait time for the availability of new, cutting edge drugs.
Specifically, Democrats recently unveiled H.R. 3, the Lower Drug Costs Now Act. This deeply flawed legislation inserts the government squarely into the middle of drug pricing negotiations by proposing two different government price setting schemes.
H.R. 3 would give the Secretary of Health and Human Services the power to “negotiate” drug prices for Medicare Part D directly with drug manufacturers. Companies would be required to sell drugs to the government and in the private market at these prices. It’s one thing for the government to dictate the prices it pays in programs it finances. It’s another thing entirely for the government to dictate the price for a good sold in the private market.
The first price control would set an upper limit for drug prices that would be equal to 1.2 times the cost of a drug’s average price in six specified countries (Australia, Canada, France, Germany, Japan, and the United Kingdom). This price control would uncouple drug prices from the market forces of supply and demand and tether them to the arbitrary whims of foreign bureaucrats.
The negative effects of this type of price setting policy is evident in the 6 countries from which we would be importing those price controls. Heritage expert Doug Bader explains:
Of new [pharmaceuticals] introduced between 2011 and 2018, 89% are available to Americans, compared with 62% in Germany and 60% in the United Kingdom. One-half or more of these new therapies are unavailable to Australian, Canadian, French, and Japanese patients.
In 1986, European firms led the U.S. in spending on pharmaceutical research and development by 24%. After the imposition of price control regimes, they fell behind. By 2015, they lagged the U.S. by 40%.
The second price control in H.R. 3 would establish an inflation rebate that would immediately punish drug manufacturers for pricing actions taken years before the legislation’s enactment. Specifically, if a drug company has raised the list price of a drug in Medicare Part B or D above the rate of inflation since 2016, they can either lower the price or be required to pay the entire price above inflation in a rebate back to the Treasury.
Tying the price of any single drug to the inflation rate is a poor idea. The inflation rate is a weighted-average change in prices for all goods and services produced—it’s completely normal for the prices of different goods, within and across industries, to change by different amounts. This scheme completely ignores fundamental economic principles and decouples a drug’s price from its cost of production.
All members of Congress should oppose H.R. 3 in addition to other proposals that may include government price setting schemes. Price controls only serve to reduce access to new treatments, stifle research and innovation, and increase health costs in the long run.
Access to new drugs is much greater in the U.S. than in countries that have implemented price controls. Of new pharmaceuticals introduced between 2011 and 2018, 89% are available to Americans, compared with 62% in Germany and 60% in the United Kingdom. Less than 50% are available to Australian, Canadian, French, and Japanese patients.
Ironically, this legislation may lead to higher prices for some drugs. Because drug companies would lack flexibility in increasing drug prices, they’d be more likely to introduce new drugs at higher initial prices than they otherwise might have.
Congress should reject foreign cronyism and not allow it to displace America’s healthcare system.
Countries with price controls also suffered a decline in pharmaceutical research and development. In 1986, European firms led the U.S. in spending on pharmaceutical research and development by 24%. After the imposition of price control regimes, they fell behind. By 2015, they lagged the U.S. by 40%.
Price controls would lead to longer wait times for treatments. For the cancer drugs available in the countries featured in the international price index, there is an 18-month average lag between the time they are available in the U.S. and availability in other developed countries.
Medicare Part D is largely working well as is. Government spending on the Part D program has been stable, despite increases in list prices for drugs. This suggests that list prices aren’t well correlated with government spending on the program and that penalizing manufacturers for list price increases is poorly conceived.
Government price-control schemes not only fail to create real solutions in the short run, but by distorting the market, they create more problems in the long run.
Americans don’t want @SpeakerPelosi’s socialist drug pricing scheme! #HR3 will reduce access to new medicines and stifle research and innovation. Congress should reject foreign healthcare cronyism! @Heritage_Action
#HR3 would tie America’s drug prices to six other price-controlled countries that drastically trail the U.S. in R&D for new medication. [@MEMBER] we should not be following these countries off a healthcare cliff! @Heritage_Action
.@SpeakerPelosi: Hands off our Medicare Part D! 🙅♀️ #HR3 would set us back to the time of Soviet-era pricing schemes and stifle pharmaceutical research and development. @Heritage_Action
European countries lagged behind the U.S. in pharmaceutical research and development by 40% after implementing price control regimes. [@MEMBER] don’t follow these countries off a healthcare cliff! Vote NO #HR3. @Heritage_Action