What Hath Washington Wrought: Part 3

This is the last in a three-part series on the new Inflation Reduction Act (IRA). The first part looked at the law’s lavish spending on green initiatives. The second part examined dubious claims of how proposed tax hikes and increased Internal Revenue Service (IRS) enforcement will raise more than enough to pay for the law’s outlays. This last part takes up the proposed new health care rules, which is where the government lodges its inflation reduction claims. It points up the harm this law might do and why two independent analysis — one by the prestigious Penn-Wharton Model and the other by the non-partisan Congressional Budget Office (CBO) — concluded that the law will do little to reduce the rate of inflation.

In one way the health care parts of this law feed inflation by adding to the flow of money from Washington into the economy. The effort otherwise address costs to some rather than overall inflation. It, for instance, limits out-of-pocket costs for Medicare patients to $2,000 and eliminates the 5% co-insurance that Medicare prescription drug enrollees have had to pay. Further, it holds Medicare drug premium increases to a maximum of 6% a year and adds a cost-sharing provision for insulin products. The law also extends American Care Act (ACA) premium subsidies instituted in the 2021 American Rescue Plan Act. These keep the premiums to at most 8.5% of a participant’s income. Since none of this change the underlying expense of medical services or drugs, the law simply shifts in the payment to the taxpayer.

Perhaps most troubling is how large a transfer the ACA premium subsidy is. It goes well beyond those in need and will include people with incomes times the poverty line. According to the CBO’s analysis, subsidies could go to families of four with an income of over $300,000 a year and single 64-year-olds with incomes of $164,000 a year.

The IRA does grant Medicare the right to negotiate drug prices and holds drug price increase to no more than the overall rate of inflation. The negotiation might make sense, but a rigid limit at the overall inflation rate penalizes drugs that are genuinely costly to produce and invites drug companies to raise the prices of some drugs faster than they otherwise would. At the very least the rigid rule on future price hikes will invite companies to set higher launch prices. That hardly serves the public or holds down inflation. A more flexible approach would better serve the needs of both consumers and producers.

Especially unsettling is the arbitrary power this new law grants. It leaves it completely at the discretion of the secretary of Health and Human Services (HHS) to select which drugs to bring into negotiation. What is more, it precludes any judicial or administrative way to dispute the secretary’s decision. If a company objects to the price set by HHS or refuses to negotiate, that firm could face and excise tax of 95% of the sales of the drug in question. Effectively, the secretary dictates drug prices and has the power to stop the sale of any drug.

There is much to object to here. No one should have the power granted here to the HHS secretary. Even if he or she were a saint, the language in the bill invites abuse. It identifies as likely targets drugs on which Medicare spends the most. But outlays could as easily reflect high use — say because the drug offers a particularly effective therapy — as a high price. Driving down the price of such drugs would effectively punish the maker for producing something especially favored by the medical community. That serves nobody and could harm many.

Most concerning is how these rules discourage drug companies from developing new useful drugs. Although there is no way to countenance price gouging, the rules should allow producers the potential for gain, or they will refuse to go through the expensive process of developing drugs and winning their approval. Without the prospect of gain, the nation will miss out on the flow of pharmaceuticals that in the past have improved and extended life in the United States and elsewhere. There are surely compromises that can secure this welcome flow of drugs and at the same time protect the public from abuse. The arbitrary power and rigid metrics of this law fails on both scores.

This third part of the series joins the others to explain how flawed this law is whatever its intensions. True, it will no more ruin the economy than it will save the planet. Much remains uncertain, but three effects are clear: 1. Taxes will rise. 2. Health care will not get cheaper, but the cost will shift to taxpayers. 3. The federal bureaucracy will increase as will Washington’s control over what the economy produces and how it does so.