The Ultimate Price Of Government Price Controls

Democrats have nudged the U.S. healthcare system closer to Canadian-style socialism with their recently signed, and dubiously named, Inflation Reduction Act.

The IRA will impose a collection of price caps on prescription drugs. Canada has long forcibly controlled drug prices—and thereby deprived patients of access to cutting-edge care. The story will be the same in the United States, unless a future Congress and president roll back the IRA’s price controls before they take effect in 2026.

Among the IRA’s suite of price controls is a provision that empowers Medicare to “negotiate” prices with drug manufacturers. Small-molecule drugs can be considered for negotiation nine years after receiving approval. For biologics, it’s 13 years after approval.

Ten drugs will be subject to negotiation in 2026, 15 in 2027 and 2028, and 20 in 2029.

It’s disingenuous to call the process negotiation. It’s more like coercion. Any firm that refuses the government’s offer will face an excise tax of up to 95% on sales of that medication—or will have to withdraw all their therapeutics from Medicare and Medicaid.

The IRA also forbids drug companies from raising prices beyond the rate of inflation. If they violate this provision, they’ll have to pay a rebate to Medicare.

Then there are the caps on Medicare beneficiaries’ out-of-pocket costs. The IRA limits what Medicare beneficiaries with diabetes must pay for insulin to $35 per month. And it caps enrollees’ out-of-pocket spending on medications at $2,000 annually.

These price controls may be politically popular. But there’s no free lunch here.

The IRA’s price controls will make firms and investors less willing to commit the billions of dollars needed to develop a successful medication, since there’s no guarantee they’ll be able to recoup their investments.

The result will be less pharmaceutical innovation and fewer lifesaving drugs.

That’s bad enough. But Canada’s experience reveals just how dangerous a government with a penchant for price controls can be.

Canada’s Patented Medicine Prices Review Board conducts cost-benefit analyses of each new drug introduced in the country. If the PMPRB determines that the cost of a medication is too high, it can order the manufacturer to reduce the price. In some cases, the mandated price cut is so severe that a drug company decides not to launch a product in Canada.

The PMPRB claims price controls are necessary to protect Canadians. But thanks to its policies, Canadians lack access to cutting-edge drugs. Of the 290 new medications introduced between 2011 and 2018, just 44% were available to Canadians, according to research from the Galen Institute.

Americans had access to 89% of them.

Canada imposes price controls across its healthcare system. Rather than paying doctors per procedure, the Canadian government gives each provider a capped yearly budget. To stay solvent, physicians routinely limit the number of procedures they perform and ration care.

The inevitable consequence is long waits for treatment. Last year, Canadians waited a median of 25.6 weeks—roughly half a year—to receive care from a specialist after referral from a general practitioner.

To further conserve the state’s resources, Canadian officials are embracing euthanasia, according to recent reporting from the Associated Press.

Canadian law allows any patient with a serious illness or disability to request medical assistance in dying. More than 31,000 patients have been put to death since euthanasia became legal in 2016. That makes it the sixth-leading cause of death in Canada.

That report from the AP relayed the story of one man with Lou Gehrig’s disease who requested euthanasia in part because he couldn’t afford the medical equipment he needed to receive care at home.

Doctors have approved euthanasia for Canadians with conditions as common as hearing loss. Others have suggested medically assisted death to patients who weren’t otherwise considering it.

Perhaps providers were worried about staying within their government-controlled budget. After all, putting a patient to death is cheaper than delivering long-term care.

In Canada, government price controls have proven deadly. Importing them stateside with the IRA will have similar consequences.