The High Cost Of The Inflation Reduction Act

ImagesCaCampaignImages11

The right policy mix to address our current economic malaise is tighter monetary policy and pro-growth tax and regulatory policies. While the Federal Reserve is on the right track for monetary policy, the newly titled Inflation Reduction Act is completely wrongheaded.

The tax provisions – such as imposing a minimum corporate tax rate – will dampen investment and diminish economic growth. Its regulatory provisions – such as the introduction of drug price controls – will weaken the incentives for innovation and ironically cause the prices of drugs to increase. On net, this proposal is a recipe for worsening inflation and persistent economic stagnation.

Starting with the Act’s corporate tax provisions, ultimately corporate taxes are paid by workers through lower wages, shareholders through lower returns, or customers through higher prices. Either way, it is American households that bear the burden from higher corporate taxes.

It is due to this economic reality that the non-partisan Joint Committee on Taxation found that a majority of the tax costs from the Inflation Reduction Act will be borne by households earning less than $400,000. As such, the Act directly violates President Biden’s pledge to not impose taxes on families earning less than $400,000 and worsens the inflation-induced affordability crises plaguing far too many families.

The duplicity of the Act goes even further. It redefines taxable income to create a charade that it is merely imposing a “reasonable” 15% minimum corporate tax. The actual tax burden is much higher and disproportionately harms U.S. manufacturers. Thus, the proposal works against the goal of improving the global competitiveness of U.S. manufacturing.

The Act’s regulatory provisions are no better. Take the key drug pricing provisions that ostensibly allows the government to negotiate the price of certain medicines. A negotiation requires compromises from both sides, however. This Act enables the government to expropriate 95 percent of the revenues (not profits) from the sale of any drug where a manufacturer does not negotiate in good faith as determined by the government. So empowered, the alleged negotiations are nothing more than a means for imposing price controls.

Ironically, the stricter the price controls that the government imposes, the higher the price patients will pay, especially patients and their employers covered by commercial health insurance.

Price controls disincentivize innovation. Consequently, potential treatments will be lost causing patients to require more healthcare services (e.g., surgeries and hospital stays). Greater use of these services will drive up overall spending and increase the costs for patients and employer-sponsored health plans. Making matters worse, opportunities to improve patients’ quality of life will be sacrificed.

The price controls contained in the Inflation Reduction Act will also counterproductively cause patients and employer-sponsored health plans to pay more for their drugs, particularly for high-cost biologics.

Biologics are high-valued medicines that treat devastating diseases, such as cancer and auto-immune disorders. These medicines, which are often infused in clinical settings, are derived from biological processes and are exceptionally costly to develop. Consequently, many originator biologics are among the most expensive medicines available. That is, until competition is introduced.

Just as generic drugs provide robust competition to branded chemical-based medicines, biosimilars are competitors to originator biologics. While more expensive to develop than generics, the costs for biologics significantly decline when biosimilar competition is introduced.

Currently, biosimilars provide robust competition across seven drug classes, excluding insulin. As I estimate in a forthcoming paper, the competitive process has reduced prices that are currently between 30 percent and 70 percent lower relative to the pre-competition prices. Relative to these pre-competition prices, biosimilars have enabled $11.2 billion in total pharmaceutical savings. Billions of dollars in future savings are likely to emerge as biosimilar competitors to Humira and Enbrel are poised to enter the market.

In a strange twist, the Inflation Reduction Act discourages this competitive process. Unlike generics, biosimilars require between $100 million and $300 million in research and direct outlays to develop. While significantly less than the development costs for originator medicines, the capitalized costs for developing biosimilars is quite expensive.

Price controls create a substantial risk that investors will be unable to recoup their capital costs if they invest in the development of biosimilars. Other alternative investment opportunities will look relatively more attractive, depriving biosimilar developers of the resources they need. The result will be less competition and higher prices.

Advocates of price controls may well respond that the lost savings opportunity from biosimilars is acceptable because the price controls will generate the savings. But price controls can only generate savings by sacrificing innovation.

Biosimilar competition generates savings while preserving the incentive for innovation by still providing the developers of originator biologics to opportunity to recover their cost of capital. And some studies have found the long-term savings from competition will be greater than what price controls can deliver. An analysis by the Association for Accessible Medicines found that competition against two originator biologics (e.g., treatments for asthma and rheumatoid arthritis, respectively) would likely generate greater savings for the commercial market than price controls.

The combination of billions of dollars in savings that biosimilar competition has generated coupled with the development of innovative treatments for cancer, rheumatoid arthritis, and a cure for hepatitis C demonstrate that the competition model works. Price controls are simply a cure that is worse than the disease.

At a time when the federal government should be improving the incentives to work, save, and invest the Inflation Reduction Act increases business costs and disincentivizes investment and innovation. If passed, the result will be less economic growth and more inflation. In other words, it increases the likelihood that American families will face an even worse problem – stagflation.

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.

Scroll to Top