The Inflation Reduction Act Was Only The Beginning

As it turns out, the fears that the Inflation Reduction Act (IRA) was simply another step toward a fully socialized healthcare system were well founded. For evidence, less than a year after the IRA was signed into law U.S. Senators Amy Klobuchar (D-MN), Peter Welch (D-VT) and 23 Democrat colleagues are now proposing another giant leap toward socialized medicine called the Strengthening Medicare and Reducing Taxpayer (SMART) Prices Act.

According to the sponsors, the Act builds on the “provision included in the Inflation Reduction Act that empowered Medicare to negotiate prescription drug prices for the first time” by “allowing prescription drugs and biologics to be eligible for negotiation five years after approval by the Food and Drug Administration and increasing the overall amount by which Medicare can lower prices through negotiation.”

This description lays bare their long-term intentions. There was never any sound policy basis for giving biologics and small molecule medicines 13 years and 9 years of FDA approval, respectively, before being potentially subject to government price controls. The same logic applies to the new benchmark of five years. These benchmarks are simply temporary negotiation concessions that the Senators have no intention of keeping.

Their willingness to support an ever-shrinking opportunity for companies to cover the costs of innovation demonstrates that the Senators clearly misunderstand how the benefits from innovative drugs arise. Like all innovations, drug advancements will only occur when entrepreneurial companies have an opportunity to recoup the multi-billion-dollar costs of capital they have incurred. Senator Klobuchar views this fundamental necessity as a temporary bargaining chip that she can manipulate to achieve her ultimate goal which was, and continues to be, comprehensive price controls on innovative medicines.

Of course, neither the IRA nor the SMART Act mentions price controls. Negotiation is the euphemism of choice. But it is not a negotiation when the government can levy excise taxes and civil monetary penalties between 65% and 95% of product sales should manufacturers fail to participate (and ultimately acquiesce) in the dialogue.

Much of the pushback against the IRA has centered on the adverse impacts that the law will have on new drug innovations, and rightly so. As the USC Schaeffer Center for Health Policy & Economics noted,

The IRA is expected to reduce revenue to pharmaceutical manufacturers from the combined effects of drug price negotiation, inflation rebates, and required manufacturer discounts. Taken together, these provisions have been estimated to lead to an approximately 31% decrease in U.S. pharmaceutical revenues through 2039 and result in 135 fewer new drug approvals during the same period.

Discussed less often, but no less important, is that the IRA compounds the problems afflicting the broader healthcare system, including the market for innovative drugs. Many of the healthcare system’s problems, including rising unaffordability and declining quality, are caused by the current third-party payer system that empowers bureaucrats over doctors and patients.

As the size and power of administrative intermediaries has grown, their influence over fundamental healthcare decisions has expanded. This expansion of intermediaries’ influence has come at the expense of patients and their doctors. Consequently, payers’ preferences are prioritized over patients, payers’ policies are substituted for doctors’ expertise, and both patients and doctors are overwhelmed with excessive administrative costs. The problems of rising costs and declining quality are the inevitable consequence.

In the case of innovative medicines, the growth of numerous drug intermediaries such as Pharmacy Benefit Managers (PBMs) has plagued the drug pricing system with adverse and misaligned incentives. Patients bear the burden through greater access restrictions and a shifting of the costs from payers to patients. By introducing a whole new layer of intermediaries – in this case price setting government bureaucrats – the IRA worsens this situation.

The goal of the new government price setting committee in the price negotiation is, allegedly, to establish value-based prices for medicines. But, if measured correctly, the value of many medicines is high.

Take hepatitis C as an example. The annual medical costs for treating hepatitis C alone could be as high as $63,000 should patients develop(ed) liver cirrhosis. Should a liver transplant become necessary, the costs could approach $600,000. There are also significant non-medical costs imposed on patients, their families, and their caregivers including large psychological and physical costs. These costs may be harder to quantify but are no less real.

Thanks to innovative medicines such as Sovaldi, treatments can now cure this disease. When working properly, the prices of the treatments should reflect the tremendous value that these medicines provide patients and their families – value-based prices. An efficient drug pricing system ensures prices of medicines reflect their underlying value.

The incentives of the government price setting bureaucracy are to price drugs cheaply, however, particularly for high valued drugs that may have exceptionally expensive prices. This bias to undervalue innovative treatments will jeopardize patients’ access to some of the most promising new therapies. In fact, access issues are a problem that plagues all countries that employ drug price controls.

Not content with the size of the adverse impacts from the IRA, 25 Democratic Senators are proposing to make this situation worse. If implemented, the Act will further disempower patients, reduce their access to current medicines, and jeopardize needed innovations to treat (even cure) diseases such as cancer, Alzheimer’s, heart disease, and muscular dystrophy.

Incentivizing innovations is essential for the millions of people living with these awful diseases. And the benefits from enabling wider access to medicines and incentivizing more drug innovations are obtainable; but only if we reverse the march toward socialized medicine.