The Impact of Price Controls on American Healthcare

Recently, the Biden administration announced that the manufacturers of the first 10 medicines targeted for the Inflation Reduction Act’s (IRA) price-setting provisions agreed to participate in what some have called a negotiation scheme. What the administration omitted was that manufacturers resisting the “negotiation” are subjected to an exorbitant federal excise tax of up to 1,900 percent on their U.S. sales of the chosen drugs.

These strong-arm tactics will not just hurt the companies the administration loves to hate. The effects of this coercion will end up hurting millions of American patients, by limiting their access to medications.

The administration and supporters of the IRA attempt to spin it as a boon for American healthcare. The reality is that it will almost certainly stifle innovation in the pharmaceutical industry. The reliance on command-and-control mechanisms that are essentially price controls will cause shortages of important — and in some cases life-sustaining — medicines.

Price controls can never work because, as economist Hugh Rockoff sums up, they necessarily distort the allocation of resources. “Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages. Price floors, which prohibit prices below a certain minimum, cause surpluses.”

In the case of the IRA, detrimental pricing provisions undermine the vital work of innovators, who invest significant time and resources — an average of 15 years and $3 billion per drug — into developing groundbreaking treatments and cures. According to a study from the University of Chicago, by 2039, there will be a loss of $660 billion in medical research and development (R&D) due to the IRA.

The ensuing impact of the IRA on American healthcare will be magnified in lower-income, minority and other underserved communities. The COVID-19 pandemic made it clear that these communities face significant barriers when it comes to accessing quality care.

Polling shows that these Americans understand the consequences of laws like the IRA. A majority of voters of color oppose increased government intervention and price controls when they learn that these policies can delay access to new medicines. Seventy-eight percent of voters of color also agree that the pandemic has made them realize the protection of R&D is paramount to the creation of new medicines and innovative treatments.

Yet some in Congress are looking to take our healthcare system further into the abyss through such misguided proposals as the SMART Prices Act and the Lowering Drug Costs for American Families Act, the latter of which would expand price controls into private health plans.

Politicians like to think of price controls as a straightforward solution to prices they just do not like. Making false promises is much easier for them than rolling up sleeves to work on legislation that prioritizes increasing health care access, facilitating and lowering barriers to innovation as to lower costs and improve health outcomes for all demographics.

The Biden administration is moving forward with the IRA’s implementation with little regard for those who will feel its effects most. But the law’s implications are beginning to set in, and the reduction in medical innovation and access will only snowball from here. Congress must fulfill its duty to the countless patients who will stand at the receiving end of this blow to our healthcare system. Strong, persistent and substantive oversight is needed to ensure accountability throughout the implementation of this detrimental law. Failure to do so would further jeopardize the American healthcare system’s ability to save lives.