Drug Price Controls Inflict Worse Harm Than Even Critics Recognize
It’s no secret that H.R. 3 — the Democrats’ plan to impose price controls on prescription drugs — would have devastating consequences for our healthcare sector.
After all, artificially restricting the price of any product invariably leads to shortages, rationing, and a slowdown in both investment and innovation.
A new study from University of Chicago economist Tomas Philipson shows H.R. 3 would not just slow down drug development but essentially stop it altogether.
Yet Democrat leaders are continuing their push to include H.R. 3 in their $3.5 trillion spending package — a bill they intend to pass through the budget reconciliation process. If they succeed, they’ll hold the dubious distinction of having destroyed the market for medical innovation with a single party-line vote.
H.R. 3 was first introduced in 2019. The legislation’s centerpiece reform would cap the price of a wide range of brand-name drugs at 120% of the average price paid in six other countries, including Canada, France, Japan, and Germany.
Each of the reference countries imposes price controls of their own on prescription drugs. So, the bill would effectively import these socialist healthcare policies to the United States. Companies that refuse to comply will be hit with an excise tax of up to 95% of the sales revenue of the drug in question.
H.R. 3’s limits on pharmaceutical companies’ revenue will make the sector less attractive to venture capitalists and other investors. Why take a risk on pharmaceutical research that might fail if the potential upside is limited by government price controls?
The upshot is less money for research and development — and fewer new cures and therapies.
An early analysis by the Congressional Budget Office projected that, if these price controls were to take effect, 38 fewer new drugs would hit the U.S. market over the next two decades.
Philipson’s analysis argues that the CBO is off by a factor of nine. He projects that pharmaceutical research and development spending would decline between 29.9% and 60% under H.R. 3. That’s equivalent to a decline of between $952 billion and $2 trillion.
As a result, Philipson estimates, between 167 and 342 new drugs would never reach patients. Those could be cures for cancer and Alzheimer’s or therapies for diabetes and heart disease. Under H.R. 3, we’d never know.
Pharmaceutical companies, meanwhile, are likely to retrench and take fewer risks with their own R&D money. So, the new medicines that do make it to market are unlikely to be revolutionary.
In the end, not just Americans but patients all over the world will be denied the kind of life-saving advances they have come to expect from the U.S. drug industry.
The American drug market has generated the revenue that’s needed to fund innovative research for decades. By one estimate, between 64 and 78% of global pharmaceutical profits come from the United States.
Sure, other countries are free-riding off the research that our drug spending funds. But the United States is much richer, in terms of GDP per capita, than H.R. 3’s reference countries. And the value that innovative drugs deliver to society is far greater than any savings the federal government will realize under the Democrats’ price control scheme.
Thankfully, not all Democrats are indifferent to the welfare of current and future patients. Several Democratic Senators, including Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ), have voiced opposition to including such price control policies in the forthcoming spending bill.
And last week, several moderate Democrats voted against including H.R. in the House Energy & Commerce Committee’s segment of the reconciliation package.
Later that day, the House Ways and Means Committee included H.R. 3’s reforms in its version of the bill. But the momentary setback for Democrat leadership shows that not everyone is on board with their plan.
And good thing. Levying price controls on prescription drugs will cost us years of medical progress, hundreds of new cures, and the lives of countless Americans.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is “False Premise, False Promise: The Disastrous Reality of Medicare for All,” (Encounter 2020). Follow her on Twitter @sallypipes.