President Biden’s and Congressional Democrats’ Build Back Better Act attempts to lower prescription drug prices. The act includes new measures that seek to dramatically limit the costs of prescription drugs in the United States by giving government agencies immense control over setting prices. Also included are measures that would require insurance providers to pay a larger percentage of Medicare treatments. Unfortunately, price controls are counterintuitive, resulting in costs being passed to consumers in the form of higher prices. Patients will also lose out on future treatments.
The Senate must kill these proposals to save patients from the disastrous consequences of stringent price controls.
Among the strategies being suggested to lower drug prices is giving Medicare the power to negotiate drug prices for the 10 to 20 most used drugs. If a pharmaceutical company refuses the “negotiated” price, it will face a 95% excise tax on gross sales. The number of negotiated drugs will increase to 20 new drugs per year. Calling this process “negotiation” is misleading since pharmaceutical companies will be forced to accept the government’s prices.
Granting Medicare the power to lower prices, pharmaceutical companies will have less capital to invest in the research and development of new drugs. It is estimated that bringing a new drug to market costs a staggering $1.3 billion. Smaller profits will only serve to further disincentivize them from developing new medications. Smaller profits mean consumers will see fewer new medications and treatments brought to market.
The Build Back Better proposal takes the substantial investments U.S. pharmaceutical companies have made in developing cutting-edge drugs for granted. The Congressional Budget Office report found that the pharmaceutical industry spent $83 billion on research and development in 2019 and stated that “Adjusted for inflation, that amount is about ten times what the industry spent per year in the 1980s.”
The Congressional Budget Office has warned about the importance of substantial R&D investments in the pharmaceutical industry. The CBO found that the price caps would result in 21 to 59 fewer drugs being brought to market over the next three decades, so consumers who might benefit from future innovations in the pharmaceutical industry would lose out.
The Build Back Better Act would also implement a price ceiling for the negotiated drugs, limiting costs to 40% to 75% of their 2020 inflation-indexed price. While some drug products are excluded from this provision for a limited amount of time, this ceiling would discourage pharmaceutical companies from launching new products.
This is because if a trial finds that the existing drug is applicable for a treatment that is not exempt, the pharmaceutical company would be punished by the ceiling and have lower profit margins.
In addition, pharmaceutical companies might be reluctant to develop a new drug if it falls under an exempted category out of fear that they will be punished with the price ceiling. When pharmaceutical companies have to operate on arbitrarily limited profit margins and are discouraged from testing new products, patients will lose out long-term on better treatment methods.
Build Back Better would also increase costs in the private healthcare market as pharmaceutical companies try to offset Medicare losses. A study by the Wisconsin Institute for Law and Liberty found that the cost of private health insurance increases by $177 after a state expands Medicare coverage. Deepening this problem through “negotiation” is unfair to consumers who choose to buy their insurance outside of the public Marketplace. This means that patients who want to choose a non-Medicare plan will face higher prices for healthcare.
By directly setting drug prices, Congress will achieve the exact opposite of what it is intending to do. If Build Back Better moves forward in its current form, American patients will be denied new treatments that could be brought to the market over the coming decades and will face higher costs down the line. The pharmaceutical industry is sounding the alarm over the proposed price controls, and the Senate must take note.
Caroline Wang is a Policy Intern at the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.org or follow us on Twitter @ConsumerPal