Here we go again.  Even though the private and competitive negotiations in Medicare Part D among insurers, pharmacy benefit managers (PBMs), drug manufacturers, and pharmacists resulted in lower than expected costs and high satisfaction, the Biden administration is calling for this system to be replaced with government-negotiated pricing, which is currently prohibited by the non-interference clause in Medicare law that protects market competition.  They claim that there would be significant savings, and this time they want to use this money to help pay for President Biden’s prolific “infrastructure” package.  But the government does not negotiate prices, it sets prices and uses price controls to achieve its objectives.

According to the July 14, 2021 Inside Health Policy, Sen. Ron Wyden (D-Ore) has said he has been negotiating with senators and that his legislation would fall “somewhere between House Democrats’ sweeping government price negotiation bill, H.R. 3, the ‘Elijah E. Cummings Lower Drug Costs Now Act,’ and the bipartisan bill he crafted with Sen. Charles Grassley (R-IA) last Congress that would slap inflationary rebates on drug makers but not give the government power to negotiate prices.”

Either bill would result in government price controls.  The provisions are likely to resemble H.R. 3 since Republicans do not seem very interested in passing Biden’s all-encompassing infrastructure bill.

H.R. 3 would negotiate the maximum price for insulin prices, at least 25-single source, brand name drugs without generic competition, and at least 125 drugs that account for the largest national spending.  The government set price could not exceed 120 percent of the average price for the same drug found in Australia, Canada, France, Germany, Japan, and the United Kingdom.  These countries use price controls in their government-run healthcare systems.  H.R 3 also includes a destructive 95 percent excise tax on medicines if companies are non-compliant with the imposed price control.  The pricing process would be similar to President Trump’s ill-advised International Pricing Index or Most Favored Nation policy that CAGW discussed in a January and November 2020 WasteWatcher, respectively.  This tax is tantamount to the theft of intellectual property and would destroy innovation in the pharmaceutical industry.

One would think that members of Congress would understand that price controls distort markets.  Many members certainly should recall what happened when President Nixon instituted wage and price controls in the 1970s in a foolish attempt to slow inflation, which CAGW discussed in its 2016 issue paper, “Pharmaceutical Price Controls:  A Prescription for Disaster.”  The Nixon price controls are a classic case of the harm price controls cause, including increased food costs and long lines for gasoline.  Yet, for some reason, many members of Congress continue to ignore (or perhaps don’t care about) the economics, reality, and past catastrophic failures of implemented price controls.

Heritage Foundation Senior Fellow Doug Badger wrote in a March 2019 RealClear Health article to blame a particular government for high drug prices, “look no further than our own.  The federal government requires manufacturers to pay rebates, grant discounts, and comply with various price-distorting directives across a range of programs.”  The VA uses multiple contracting systems, Medicare uses a 70 percent drug rebate in the coverage gap, Medicaid requires a federal government rebate of 23.1 percent and practically every state gets an additional rebate.  The 340B safety-net discount program for the uninsured poor only had 50 participating hospitals in 1992, shortly after the safety-net program was created.  Now the program accounts for more than half of all drug purchases by hospitals.  They and their for-profit contract pharmacies keep the price spread between the 340B discount and what insurance pays.  Badger wrote, “By extorting price concessions from manufacturers across a broad range of programs, the U.S. government does what it accuses foreign governments of doing: artificially driving up drug prices.”

Piling more price controls on a sector of the economy that is already burdened with them is a reckless and fiscally unsound idea.  A back of the envelope calculation shows why price controls are distorting the market.  In 2019, total prescription drug expenditures amounted to $369.7 billion.  Of that amount, just three of the major government drug benefit programs expenditures were $104.6 billion in Medicare, $31.4 billion in Medicaid, and $4.1 billion in the VA, for a total of 38 percent of all drug expenditures.  When price controls are involved in some matter to almost 40 percent of a market, they will have a negative effect.

None of the price control proposals being considered will help lower drug costs or benefit patients if adopted as a pay for in the record-breaking infrastructure bill.  If implemented, the proposals will drive up costs, hurt innovation, and stifle the development of pioneering drugs for complex ailments like Alzheimer’s and rare diseases.

There is a solution to bringing down drug costs.  A proposal by the American Action Forum that would “realign incentives” and place more risk on insurers and PBMs to encourage more robust negotiation and protect beneficiaries from catastrophic financial risk by capping their out of pocket expenses.

If Congress is going to pass a massive “infrastructure” bill, the best offset to the increased spending is to cut government waste rather than agree to provisions that will increase government control of the pharmaceutical industry, accelerate the already high inflation sweeping across the country and continue to increase the national debt, inflicting significant damage on the economy and taxpayers.