Federal government intervention has greatly distorted American health care spending for decades. In his State of the Union address on Tuesday, President Joe Biden noted how the misnamed Inflation Adjustment Act (IRA) would further reduce medical care costs by “finally empowering Medicare to negotiate drug prices.” The result is largely controlling prescription drug prices. And price controls will do to prescription drugs what they do to all other imposed goods: create shortages, queues, black markets and rationing.
Worse, drug price controls will have the additional deleterious effect of increasing disease, disability, and death while simultaneously increasing total health care costs. How? Because price controls significantly reduce the incentive for pharmaceutical and biotechnology companies to research, develop, and deploy innovative new drugs that will prevent and cure illness and lower overall costs.
That’s the conclusion of a November 2021 study by University of Chicago economist Thomas J. Phillipson and his colleagues that analyzed the impact of IRAs on biopharmaceutical innovation and patient health. The study calculated that by 2039, the IRA would reduce pharmaceutical revenues by 12 percent, resulting in a $663 billion reduction in research and development (R&D) spending. According to the authors, the reduction in R&D spending would lead to 135 fewer new drug therapies, resulting in a potential loss of approximately 331 million patient lives by 2039. In comparison, as of January 2022, the COVID-19 pandemic caused losses. About 13.5 million life years in the United States.
Biden also emphasized that new price controls on prescription drugs would “reduce the federal deficit, saving taxpayers billions of dollars on the prescription drugs the government buys for Medicare.” Maybe so, but an August 2022 study by Phillipson and his colleagues calculated that what Medicare and other health care providers could save on prescription drugs over the next 20 years would be more than offset by increased spending on other types of medical care.
The study analyzed data to show how, over time, the development of new drugs has significantly reduced overall health care costs that would otherwise have occurred. The researchers found that the new drugs saved money by reducing the need for hospitalization, surgery and other expensive treatments such as disability care. Applying these findings to the results of the development of 135 fewer drug therapies through 2039, the researchers calculated that “the average increase in total healthcare spending over the 20-year period would be approximately $50.8 billion.”
The real way to lower prescription drug prices and, incidentally, slow healthcare cost increases while maximizing patient outcomes is to increase competition. This can be accomplished by speeding up Food and Drug Administration approvals and paying competitors to avoid patent abuses and other drug company shenanigans, such as delaying the introduction of generic versions of their patented drugs. Instead of controlling Biden’s drug prices, patient welfare would decrease and overall health care costs would increase. It’s a lose-lose for all of us.