Report shows drug price controls help China more than U.S.

Center of the American Experiment released a report today that shows efforts in Washington, D.C. that rely on price controls to lower the costs of prescription drugs are not an effective tool to lower the high and rising cost of health care in America. Rather, the report finds price controls will reduce the number of new life-saving drugs on the market and hurt America’s global leadership, especially as it relates to China. The report is titled Pharmaceutical Price Controls: Impact of Drug Pricing Legislation on Access to Life-Enhancing Drugs and examines several proposals being considered by Congress, most notably the healthcare provisions of President Biden’s Build Back Better agenda.

While the Build Back Better legislation purports to lower healthcare costs by allowing Medicare to “negotiate” drug prices, the negotiation provisions function as price controls due the punitive financial penalties levied on drug manufacturers that don’t cooperate. These price controls will lower the return on investing in new drugs, resulting in fewer new life-saving drugs coming to market. Moreover, by adopting price controls in line with other countries, the U.S. would be giving up a key competitive advantage in the biopharma industry. China would almost certainly fill the void in research and development, take greater market share of new drugs, and use this market share as diplomatic leverage as it has done with their COVID-19 vaccine exports. This would both weaken U.S. access to new drugs and put our national security at risk.

Any cost savings from price controls cannot justify the risk of losing access to new drugs and giving China a greater share of the global biopharma market. As the report finds, national health expenditure data show the growth in retail drug prices represent only a small portion—just 2.4 percent—of the growth in health care costs over the past 10 years.

“The price controls found in the Build Back Better agenda will hardly make a dent in the high cost of health care for consumers and ultimately make the world less healthy and less safe,” said Peter Nelson, Senior Fellow at American Experiment and chief author the report. “Instead of heavy-handed price setting, the federal government can introduce policies to drive efficiencies and lower prices through stronger competition.”

Key findings in the report include:

• The authority to “negotiate” drug prices in Build Back Better is in fact the authority to set and control prices. While Build Back Better authorizes the Secretary of the Department of Health and Human Services (HHS) to negotiate drug prices, the bill also includes a punitive excise tax escalating up to 95 percent of the total sales of the drugs subject to “negotiation.” As such, the negotiation provision functions as a price control.

• Build Back Better price controls will make R&D investments less attractive and, as a result, reduce the number of new drugs. By design, Build Back Better’s price controls—both the HHS price setting and inflation rebates— will reduce drug manufacturers’ expected lifetime revenue from a new drug. Lower revenues will reduce the expected return on R&D investments, which will make the investments less attractive and, in turn, lower spending on R&D. Less spending on R&D will naturally result in the development of fewer new drugs.

• Fewer new drugs will undoubtedly harm global health and well-being. Overall, lower prices can improve health to some degree by increasing the use of existing drugs while, in the long run, fewer new drugs will lower the quality of life and life expectancy for people who would later benefit from new drugs. However, under the structure of Build Back Better’s price controls, price reductions are not expected to lead to a measurable increase in utilization.

• A focus on prescription drug prices is not an effective strategy to control the overall cost of health care because drug prices are not responsible for the recent growth in health care costs. A review of the most recent 10 years of National Health Expenditure (NHE) data from the Centers for Medicare & Medicaid Services (CMS) for 2010 to 2020 shows retail prescription drug expenditures represent only a small portion of the recent rise in health care costs.

• Price Controls on prescription drugs will weaken the U.S. biopharma industry’s global leadership. Research shows price controls do impact decisions on where biopharma companies choose to locate. Therefore, by adopting price controls in line with other countries, the U.S. would be giving up this competitive advantage.

• China is well positioned to take advantage and take market share if price controls weaken the U.S. position in the global biopharma market. The U.S. has both strong economic and national security interests in maintaining global leadership in the biopharma and other advanced industries, especially in relation to China.

A copy of the full report can be accessed at www.americanexperiment.org/reports