The Department of Health and Human Services (HHS) recently announced the first 10 drugs it will be directly negotiating the price of for Medicare. While intended to rein in Medicare spending, this will also decrease how many new medicines come to market in the future and artificially incentivize complex drugs that are difficult to make generic versions of over simpler ones.

When the Inflation Reduction Act (IRA) was passed in 2022, HHS was granted authority to select a group of pharmaceuticals each year that it would “negotiate” prices directly with manufacturers. The first 10 of these were announced in August of this year and the price controls for them will go into effect in 2026. HHS will add 15 more drugs to the list in 2027 and 2028, followed by up to 20 each year after that. Any manufacturer that does not reach an agreement with HHS over its drug prices will either be subject to extra taxes as a penalty or must withdraw their drugs from being covered under Medicare.

This puts companies in a position to accept whatever price Medicare sets. While some may see the HHS price negotiation as a de facto price cap on medicines, the HHS doesn’t need to compromise and can punish any company that doesn’t accept their offer with an excise tax reaching 95 percent on U.S. profits from the drug in question.

As the House Budget Committee, the Wall Street Journal, and others have pointed out these price controls will increase the price of drugs for patients outside of Medicare and reduce pharmaceutical innovation. Price controls also delay the timing of, or prevent altogether, new drug launches as firms avoid the country where price controls are implemented. Pharmaceutical companies based inside the country tend not to expand outside of the country as much as in non-price-controlled markets.

For all the savings achieved in Medicaid, estimated at $160 billion over 10 years, thanks to problems such as a reduction by almost 25 percent of new drugs, the welfare costs to U.S. citizens will be between $5.7 trillion and $13.3 trillion. The low prediction is that these price controls that American people will pay, at minimum, will be almost 36 times as much as Medicare is predicted to save.

One report from the U.S. Chamber of Commerce found that markets with price controls on pharmaceuticals have fewer new product launches, biologics, and oncology treatments, as well as delayed access for patients. This reduces patients’ and doctors’ choices for treatment, cutting off lifesaving medicines.

Price controls discourage investment in general, but the specific provisions of the IRA also distort the remaining investment in potentially harmful ways. Pharmaceuticals can be added to Medicare’s list of ‘negotiated’ drugs after 9 years for small molecule drugs and 13 years for biologics. This has already caused a shift in pharmaceutical investment away from small molecule drugs to biologics, which are much more difficult and expensive to make generic versions of, raising the costs and lowering the availability of future drugs.

Eli Lily is already predicting less small-molecule drug research, has dropped a study on a blood cancer drug, and is limiting future small-molecule drug research in response to the incentives created by the IRA. Novartis has also expressed concerns about the price controls’ effects on ongoing and planned RNA research as well. In total, 63 percent of PhRMA members expect to shift research to biologics and 78 are planning to cut early-stage research, potentially costing patients both money and health in the long run.

The IRA has other distortionary effects on investment and research as well, such as treating drugs with more than one use differently than those with only one. In order to keep a medicine off the “negotiated” price list, Alnylam has decided to wait and test one of its already developed medicines for a second use in treating a rare eye disease. If the medication could treat two rare diseases it would lose its exemption from being chosen by Medicare and be fair game for Medicare’s price control list. Instead, the company may elect to try to develop a second medicine entirely, potentially adding time and cost to a treatment that will ultimately be borne by patients.

Pharmaceutical price controls sacrifice long-run research gains in medicine for short-run savings, which are an illusion after the increased drug prices outside of Medicare and delayed access to medicine throughout the U.S. healthcare system. Price caps will cost patients both money and lives.

Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.