Despite what politicians claim, drugs are not the main driver of growth in health-care spending — and capping their prices would only worsen the problem.
Despite what politicians claim, drugs are not the main driver of growth in health-care spending — and capping their prices would only worsen the problem.
H ealth–care spending continues to grow, imposing an ever-increasing burden on patients, employers, and taxpayers. Today, health-care spending accounts for roughly 18 percent of GDP, up from less than 7 percent in 1970.
Members of both parties recognize that this cost growth is unsustainable for our public health-care programs, Medicare and Medicaid. Yet most of the proposals in recent years to curb health-care spending — such as the Inflation Reduction Act’s price controls on pharmaceuticals purchased through Medicare, or President Trump’s push for most-favored-nation drug pricing — have narrowly targeted prescription drugs.
As my University of Chicago colleagues and I show in a new paper, however, it’s impossible for these proposals to dramatically curb future spending growth as policymakers hope. Indeed, proposals to constrain drug costs may raise rather than lower long-run spending growth.
That is because prescription drugs, despite the outsized attention they receive in Washington, account for only 14 percent of overall health-care spending. Even if drug spending stopped growing entirely — due to the hypothetical enactment of universal price controls and rationing to halt the increasing number of prescriptions dispensed to America’s aging population — total health-care spending would continue to increase by over $240 billion per year.
This means even a drug price control and rationing regime that is far more aggressive than anything politicians have proposed would only reduce the growth in overall health spending by 13.7 percent.
By contrast, halting any increases in hospital and physician spending would reduce total health-care spending growth by almost 47 percent. In other words, targeting hospital and physician spending would be nearly two-and-a-half times more effective at slowing health-care spending growth compared to targeting drugs.
Of course, no sensible individual would call for universal price controls on hospitals or physician services — that would cause many providers to go under. But the theoretical is useful nonetheless. If politicians want to get America’s health spending under control, they will need to find market-friendly ways to address these much larger cost drivers, hospitals and doctors’ offices, instead of fixating on the small share of the nation’s health bill devoted to prescription drugs.
Basic economics tells us that price controls on any product or service disincentivize companies and workers from supplying it. That was true of gasoline price controls in the 1970s, and it’s true of price controls on health-care products and services today.
Look at the damage that has already been done by former President Biden’s Inflation Reduction Act (IRA), which gave Medicare sweeping authority to dictate the prices of certain drugs. Already, the IRA has contributed to companies having to discontinue 26 drugs and 55 research programs. My colleagues and I recently estimated, in a separate paper, that more sweeping “most-favored-nation” price controls on all drugs purchased through Medicare and Medicaid could prevent the development of 210 new drugs and the approval of 290 new drug indications over the coming decade.
Price controls on medicines are particularly harmful because drugs are one of the only scalable solutions to combating the chronic disease epidemic. Unlike hospital or physician services, which generally increase in cost over time, each new drug eventually collapses in price once patent protections expire and cheaper generic versions become available.
In the long run, new medicines often more than pay for themselves by keeping people healthier and averting spending on tests, doctors, and hospital stays. But there are no such long-run savings from drugs that are never invented because of price controls. By disincentivizing drug development, health-care spending growth is ultimately accelerated.
Despite this reality, the conversation around health care in Washington remains stuck on drug pricing. Otherwise, it’s bogged down in debates about how extensively we should subsidize Obamacare exchange plans, which cover barely 6 percent of the U.S. population.
Our leaders are too focused on health-care policy changes that would only marginally change the trajectory of overall health-care spending, which is overwhelmingly driven by hospital and physician services. Drug price controls will not and cannot meaningfully reduce overall spending — but they would have disastrous long-term consequences to America’s health and finances.