Drug Price Negotiations

Washington has just released a list of the first 10 prescription drugs that will be subjected to compulsory price controls. Under the so-called Inflation Reduction Act, our government will “negotiate prices directly with participating manufacturers for selected drugs that have high total spending and are high expenditure, single source drugs without generic or biosimilar competition.” By coincidence, five of the drugs on the list (Eliquis, Jardiance, Xarelto, Januvia, Imbruvica) are made by U.S. manufacturers, and they also appear on the list of Medicare’s most expensive prescribed drugs.

Five others, (Farxiga, Entresto, Enbrel, Stelara, Novolog), made outside of the U.S., will not be subjected to negotiation. Medical News Today lists the ten most commonly prescribed medications in the U.S., and none of them make Washington’s list of drugs subject to negotiations. In short, the drugs that will be negotiated are those within the reach of the long arm of the U.S. government, and they represent half of the drugs that raise Medicare drug costs the most. The given reason for these price controls is to lower drug costs for Medicare and Medicaid patients, but we should remember that many pharmaceutical manufacturers lower their prices for patients in poorer countries, for compassionate reasons. Will these American companies whose profits will be affected now raise prices for their products when they sell them overseas? Will all this contribute to off shoring of more American companies?

The Fact Sheet put out by the Assistant Secretary for Planning and Evaluation (ASPE) Office of Health Policy presents two tables. One shows out-of-pocket costs, since “Medicare enrollees taking the 10 drugs covered under Part D selected for negotiation for initial price applicability year 2026 paid a total of $3.4 billion in out-of-pocket costs in 2022 for these drugs.” The other table shows demographics, including gender, age, race and ethnicity, and geographic area, i.e., where the voters are. ?Surprisingly, “Among enrollees who do not receive financial assistance, average annual out-of-pocket costs ranged from a high of $6,497 per enrollee for Imbruvica to a low of $261 per enrollee for NovoLog.” So why is Novolog on the list?

Ronald Bailey, writing for Reason on 8-31-2023, leads off with the following: “Government-imposed price controls on goods and services always lead to shortages.” He also quotes the economist Tomas Philipson from the University of Chicago who “calculated that the proposed drug price controls would lead to a 44.6 percent decline in pharmaceutical company research and development and 254 fewer new drug approvals between 2021 and 2039.”

In short, price ceilings for pharmaceuticals mean less money for research and for the development of new, potentially life-saving drugs. Grace-Marie Turner of American Healthcare Choices also quotes another prediction of Philipson that, as a result of the impending negotiations, “Drug development?will be decimated as 135 fewer drugs will be brought to market, amounting to?$18 trillion in health-related losses?through 2039.” Moreover, he writes, “This drop in new drugs is predicted to generate a loss of 331.5 million life years in the U.S.--31 times as large as the 10.7 million life years lost from COVID-19 in the U.S. to date.”

Price controls are not new. Their history goes back to the ancient Israelites, Egyptians, Babylonians, Greeks and Romans, but what are they? As described by Investopedia, price controls are government-mandated minimum or maximum prices that are imposed on essential consumer staples, which only are effective on an extremely short-term basis. Still, if at first the caps on prices lower out-of-pocket costs, they may be wildly popular with the public, until they bite, because, economists tell us, in time they cause shortages, which lead to rationing, long wait times, and illegal black markets. Next, as producers feel the financial squeeze, the quality of their product begins to deteriorate. One example is rent control. In Cairo, Egypt, we saw buildings falling to ruin because rent control prevented landlords from charging for maintenance and or any improvements to their property.

Unfortunately, price controls bring rationing, and with rationing comes the problem of how to make periodic readjustments in response to different supplies, demands, and types of consumers. This then leads inevitably to corruption and to favoritism toward those groups that have the most effective lobbyists. ?With that, in our modern world, will come a raft of lawsuits. At least it will be good for the lawyers.

Also, when demand is suppressed in one area, it shifts to another area, making it necessary to control even more prices. This sort of thing brings armies of lobbyists to Washington and leads to complaints of unfairness – and more lawyers. An example occurred when President Roosevelt issued a limited order in April 1943 to “hold the line,” which led to the capping of a wider range of prices. Again, in 1971 Nixon imposed a 90-day freeze on wages and prices to control inflation, but it ended in a recession. None of this encourages additional production, which is what really lowers prices.

We have been there before; we did not like it, and we stopped it.? Will we like it this time?