Dems’ Reconciliation Bill Would Push US Economy Over Cliff


Inflation is at its highest level in four decades, according to federal data out last week. Senate Democrats say they have a solution — their newly revamped budget reconciliation bill, which would levy price controls on prescription drugs and provide billions in subsidies for health insurance sold through Obamacare’s exchanges.

How this proposal is supposed to fight inflation is a mystery. By shoveling tens of billions of dollars to insurance companies, it would further insulate people from the cost of health care — and free providers and insurers to raise their prices.

The price controls wouldn’t take effect for a few years. So today’s patients would be unlikely to see lower prices. But the specter of those price controls would destroy the incentive for companies to invest in research and development.

That would result in fewer jobs and fewer new therapies and cures for tomorrow’s patients.

The billions in insurance subsidies would represent an extension of premium tax credits scheduled to expire at the end of this year. Those subsidies, which went into effect in 2021 under the American Rescue Plan Act, ensured that no American, no matter his or her income, paid more than 8.5% of their income for health coverage through the exchanges.

They were always difficult to justify. For starters, these more generous tax credits are projected to cost over $30 billion this year alone — 50% more than the Congressional Budget Office’s estimate from just last year, according to a May analysis of CBO data by former Trump administration economic adviser Brian Blase. The subsidies could cost $35 billion each year they’re extended, Blase projects.

Three-quarters of the subsidies this year and last went to people who already had coverage before they took effect. In other words, President Biden and congressional Democrats devoted billions of taxpayer dollars to people who previously had little problem paying for coverage on their own.

Of course, the ultimate recipients of all this largesse are insurers. They’re pocketing the subsidies and raising premiums anyway. The Kaiser Family Foundation projects a median rate hike of 10% next year, according to an analysis of 72 insurers’ rate filings.

Extending these subsidies until 2025, as the Democrats are seeking to do, would cost at least $40 billion under the most optimistic forecasts — and potentially more like $70 billion.

They propose to pay that tab by having the federal government “negotiate” with manufacturers over the prices of a steadily increasing number of drugs. Never mind that these negotiations are in name only — the bill sets the maximum prices the government will pay and threatens confiscatory taxes for noncompliance.

Further, the Democrats’ numbers don’t add up. These price controls wouldn’t generate any savings for the government until they take effect in 2026. But the extended insurance subsidies would start in 2023.

Another provision that would penalize drug companies for increasing the cost of certain drugs faster than the inflation rate would begin next year. But according to CBO data, the savings from that change wouldn’t come close to covering the cost of the new subsidies.

There’s no reason to believe that Democrats will let the enhanced Obamacare subsidies expire in 2025, even if they no longer control the presidency and both houses of Congress. After all, as Nobel laureate economist Milton Friedman once said, “Nothing is so permanent as a temporary government program.”

If those subsidies did indeed become permanent, the program’s 10-year cost would balloon to $220 billion.

That’s a hefty tab for price controls to cover — especially given their costs to the economy.

Research from two economists at the University of Chicago projects that price controls like those contemplated by Democrats would reduce research and development investment by more than $660 billion through 2039. That would result in 135 fewer new drugs and a collective loss of more than 330 million years of life.

The new reconciliation package is smaller than Democrats were hoping for. But it includes enough reckless spending and growth-destroying reforms in the healthcare sector to exacerbate the current inflation’s devastating impact on our economy.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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