The Problems with Drug Price Controls

T his month, the Biden administration announced the initial ten drugs, of an eventual total of at least 60, that will be subject to new price controls under the Inflation Reduction Act (IRA). The selection illustrates what goes wrong when government bureaucrats try to control prices rather than enhance competition.

All the initially selected drugs are in the Medicare retail prescription-drug program, which represented only 13 percent of total Medicare spending in 2021. The program has historically received bipartisan praise for enabling public financing while retaining private competition. The competition within the program has led to far lower spending than projected by the CBO at its start in 2006. Now the IRA and bureaucrats are folding this program into the same type of centralized pricing set in Washington as for hospitals and doctors that has put Medicare on an unsustainable fiscal path.

The ten selected drugs must be from the top spenders and thus make up a significant portion of total expenditures. They are not blockbusters because their prices are above the drugs’ value to patients, but because demand for them from doctors and patients is high. That’s because they’re affordable and effectively treat chronic diseases that are very common among Medicare patients.

Data from the Department of Health and Human Services itself show that, of the ten initial drugs selected, seven had copays by beneficiaries that were around a dollar or less per day in 2022. If good health is the most valuable thing in life, presumably a much lower price than a daily coffee is a great deal. A dollar a day is less than the 35 dollars a month on insulin copays the IRA also mandated, which the administration celebrated as solving the insulin-copay problem. The selection of drugs could not send a worse signal to medical R&D investors: If you invent a drug that helps many patients at an affordable price, the government will come after you.

Patents for many of the drugs selected last week will expire soon and price competition is just around the corner. When a drug patent expires, generic- or biosimilar competition comes in and dramatically lowers prices. Although the IRA states that drugs with generic or biosimilar competitors should be exempt from the price controls, six of the ten selected drugs (Enbrel, Entresto, Januvia, Stelara, Xarelto, and Novolog) have such competition coming in before or shortly after the launch of the price controls in 2026. However, because of poor IRA rules, the negotiations will launch even if the competition enters before 2026.

This is a threat to the U.S. generic-drug market, which has delivered lower prices than price-controlled single-payer markets abroad, including in Europe. In contrast to government price-fixing, private price competition protects patients — the low prices being one reason generics are more than 90 percent of U.S. prescriptions.

There is also no way for drug developers to know with any certainty whether the brand drug they seek to compete with will end up being a negotiated drug. Before the Biden administration’s announcement, no one knew exactly which drugs would be selected. This was due to the reliance by the Centers for Medicare and Medicaid Services (CMS) on data not available to the public.

Biosimilar entrants need to invest hundreds of millions of dollars in studies for FDA approval several years before coming to market. Thus, the IRA creates significant uncertainty as to whether a biosimilar will be able to recoup its investment. Even regulators are concerned. The director of the Food and Drug Administration’s drug center has said she is “very worried” about the IRA’s potential harm to drug development.

The IRA dictates that drugs are selected based on list prices, which in the pharmaceutical industry can differ dramatically from the transaction prices that drug companies receive. Private drug plans and pharmacy-benefit managers obtain large discounts below list prices from drug companies in exchange for the plan offering lower copays for the drug or less interference with doctors prescribing it.

For the ten drugs selected, such competition is already substantial in pushing down transaction prices. In fact, six of the selected drugs are in classes with transaction prices less than 60 percent of list prices. In general, this type of price competition lowered the spending of the Medicare program by 23 percent in 2021, according to a report of the Medicare advisory committee MedPAC.

Bureaucrats may have noble objectives, but their expertise never beats that of the masses in markets whose livelihood depends on accurate knowledge. Never mind that the new pricing center at CMS was appropriated more than $3 billion and 90 new positions to get it right. The launch of the new price-fixing program is a stark illustration that policies enhancing increased brand-to-brand competition, as well as competition after patents expire, are the route to better helping patients.