August 31, 2023 - 9:00 pm
Economic fallacies are like horror movie villains. They just won’t stay dead.
On Tuesday, the Biden administration announced it had selected 10 drugs for Medicare price “negotiation.” The list included drugs for diabetes, heart failure and blood cancer, among others. The White House said these are some of the most costly to the Medicare Program. In future years, Medicare will negotiate the prices on dozens of other drugs. The administration claims this will save money for both Medicare recipients and taxpayers
This sounds innocuous, even necessary. Of course, the federal government should use its purchasing power to obtain lower prices. But that’s not what’s happening here.
Consider Bristol Myers Squibb. Its blood thinner, Eliquis, is one of the 10 drugs on Mr. Biden’s list. In a real negotiation, the company and Medicare would meet together. If they couldn’t come to a mutually beneficial agreement, both would go on their separate ways. But that’s not what will happen under the Inflation Reduction Act, which created this arrangement.
That bill sets the price ceiling of a selected drug from 25 percent to 60 percent of its list price. If a drug company wants to walk away, the law hits it with a daily excise tax that begins at 186 percent of the daily revenue generated by the drug. The tax eventually climbs to a staggering 1,900 percent.
That’s not a negotiation. It’s a stickup. What the Biden administration is looking to do is institute price caps on drug prices, disguised with rhetorical flourishes.
It’s easy to predict what will happens next, especially if you’re familiar with the long-term damage done by rent control. Drug companies will invest less in making new drugs. A University of Chicago study from November 2021 projected that 135 fewer drugs through 2039 would be brought to market because of this law. The study found that would cause a loss of 331.5 million life years in the U.S. For context, at the time of the study, COVID-19 had resulted in 10.7 million life years lost in this country.
This isn’t mere conjecture. Economist Tomas Philipson, one of the study’s co-authors, reported that at least two dozen drug companies have already pulled back on drug development because of this bill.
In response, pharmaceutical companies have sued. They argue that this scheme violates the “takings” clause of the Fifth Amendment. That prohibits the government from taking private property for “public use, without just compensation.” Although how courts will rule is uncertain, that’s obviously what’s happening here.
Those who look forward to lifesaving medical breakthroughs should hope these lawsuits are successful.