TL/DR –
Under the Inflation Reduction Act of 2022, the Centers for Medicare and Medicaid Services (CMS) will engage in negotiations with drug manufacturers to set prices for select Medicare drugs, a move that critics argue will discourage investment in breakthrough medications and potentially create drug shortages. The CMS will progressively negotiate a larger number of prescription drugs and set fixed prices to take effect in 2026, but pharmaceutical companies that refuse to accept the set prices will be subject to punitive taxes. Critics also warn that government price controls will shift costs from the controlled sector to the uncontrolled sector, thereby increasing drug costs and health insurance premiums for individuals and families enrolled in private and employer-sponsored health insurance plans.
Implications of the 2022 Inflation Reduction Act on Senior Citizens
The Inflation Reduction Act of 2022 allows the Centers for Medicare and Medicaid Services (CMS) to negotiate drug prices within the Medicare program. The new law has been touted as a solution to high drug costs for seniors, however, it could also deter investment in breakthrough medications amidst ongoing prescription drug shortages and precarious drug supply chains.
Medicare Drug Price Negotiations
In the near future, the Medicare administration will set drug prices through a progressive negotiation process, with the first set of drugs subject to this process by September 2023. Prices will be finalized by September 2024 to be effective in 2026. The CMS will utilize a comprehensive data collection project to establish drug prices, including cost, sales information, and comparative effectiveness of therapeutic alternatives.
Challenges of Drug Pricing Regulation
Starting in 2026, Medicare beneficiaries will be able to purchase the first set of prescription drugs at the CMS’s “maximum fair price”. However, this price setting process is not subject to judicial review, and non-compliance incurs a hefty penalty, marking it as a coercive measure rather than a negotiation. Despite initial popularity, the policy could lead to increased drug costs in the private sector to compensate for lost Medicare revenue.
Impact on Drug Availability and Innovation
Government price controls often reduce the availability of goods and services in the affected sector. Anticipated shortages due to this policy could lead to fewer new drugs coming to market. Estimates project 13 fewer new drugs in the next 30 years. Other analyses, such as those by University of Chicago economist Thomas Philipson, suggest a more significant impact, predicting up to a 21.7 percent reduction in research and development for cancer drugs due to this act.
Reversing Dependence on Foreign Medication Suppliers
Currently, many vital medications for Americans are manufactured overseas, specifically in China. As noted by Rep. Brad Wenstrup (R-OH), this reliance on unstable or hostile foreign sources could be reversed with recommended policies from The Heritage Foundation.
Addressing Persistent Drug Shortages
In 2023, the US faced a shortage of 309 drugs due to various factors. With the projected increase in Medicare beneficiaries from over 65 million today to almost 84 million by 2040, a more reliable drug supply is crucial.
Emergence of Antibiotic Resistant Bacteria
The rise of antibiotic resistant bacteria is a serious threat. In 2019, the CDC reported 18 such pathogens that infected at least 2.8 million Americans. Therapeutic innovation is essential in addressing this issue, hence, policies that could discourage such innovation are counterproductive.
Critical View of the Inflation Reduction Act
The Biden policy of government price fixing in the face of a challenging international and economic environment is deemed reckless. It is seen as an outdated strategy to reduce costs by controlling supply, irrespective of market demand. This could result in another painful lesson in government central planning for Americans.
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