New Studies: The Dangerous, High Costs of “Inflation Reduction Act” Price Controls

By SBE Council at 29 June, 2023, 7:12 am

SMALL BUSINESS INSIDER

by Raymond J. Keating –

The ills of government price controls are straightforward from an economics perspective. That is, price controls limit actual and potential returns, reduce resources available for investment, and diminish entrepreneurship, investment, innovation, supply and quality.

When such ills are applied to the pharmaceuticals, biotechnology and medical device sectors, for example, which are all endeavors rich in risk, uncertainty and considerable costs, the results mean fewer new and improved medical treatments. In turn, the costs don’t just include lost businesses, investment and jobs, but also lost lives and diminished health.

Two recent studies have estimated assorted ills from recent efforts to inflict price controls on biopharmaceuticals.

On June 1, 2023, Vital Transformation released a study estimating assorted costs of the Inflation Reduction Act (IRA). In a statement, it was noted: “Vital Transformation’s data shows that, even when using the most optimistic scenarios under Medicare’s guidance for negotiations, patients will lose access to 40% of medicines that would have otherwise been developed over the next 10 years because of the IRA’s price controls. And this estimate is on the conservative side – it assumes Medicare will set negotiated prices at the IRA’s ceiling price, but Medicare is likely to be more aggressive.”

Among key findings in the study – which “modeled and estimated the impacts of the Inflation Reduction Act’s (IRA) pricing provisions for a cohort of the top 200 Part B and D drugs by CMS spend, resulting in 92 drugs impacted by IRA in the next 10 years, which are produced, collectively, by 41 biopharmaceutical companies” – were:

● “Had the IRA been in place beginning in 2014, we estimate the reductions in revenue on the impacted drugs to be up to 40%. Because of this, between 24 and 49 therapies currently available today would most likely not have come to market and therefore not available for patients and their providers.”

● “Looking forward, we estimate that because of the IRA pricing provisions, the substantial reduction in revenue will significantly narrow investment opportunities. Conservatively, as many as 139 drugs over the next 10 years are at risk of not being developed at all.”

● “…we estimate a loss of between 66,800 – 135,900 direct and 342,000 – 676,000 indirect jobs in the U.S. biopharma ecosystem.”

In addition, Vital Transformation released another study on June 15, 2023, that estimated the costs of proposed expansions of government-mandated drug pricing policies, specifically, “drug pricing provisions of President Biden’s 2024 Budget, now proposed by Senator Baldwin as the ‘Smart Prices Act (SPA)’, which would impose government price setting for selected Medicare drugs at only 5 years after initial FDA approval.”

Among the grim estimates were the following:

● “Had the drug pricing provisions of the SPA been in place prior to the development of today’s top-selling medicines, we estimate that 82 of the 121 therapies we identified as selected for price setting would likely have not been developed.”

● “Looking forward, we estimate that the expanded government price setting could result in roughly 230 fewer FDA approvals of new medicines over a ten-year period, once the impacts are fully reflected in the pipeline.” It also was pointed out, “Impacts will be felt most heavily in many areas of unmet need, including in rare disease, oncology, neurology, and infectious disease.”

● “We estimate a loss of between 146,000 – 223,000 direct biopharmaceutical industry jobs and a total of 730,000 – 1,100,000 U.S. jobs across the economy if the proposed IRA expansion were to be implemented.”

The following graphic from Vital Transformation sums up the ills of price controls as found in each of these recent studies.

Finally, it must be noted that the biopharmaceutical sector overwhelmingly is populated by small to mid-size, entrepreneurial firms. Among employer firms in the pharmaceutical and medicine manufacturing industry, based on the latest U.S. Census Bureau data (2020):

● 61.6% of employer firms had fewer than 20 employees

● 80% had fewer than 100 employees

● 91.9% had fewer than 500 employees

For all of the political talk about so-called “Big Pharma,” this sector of our economy very much is about small, entrepreneurial enterprises. Whether firms are big or small, price controls mean less investment, less innovation, and fewer live-saving and life-enhancing treatments.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.