Biden's plan to negotiate drug prices carries a hidden cost
President Biden’s plan to let the federal government negotiate drug prices has Big Pharma fuming, according to a new industry study.
New policies in the White House’s fiscal 2024 budget and a proposed Senate bill could lead to 237 fewer FDA approvals for essential medicines over ten years, according to Vital Transformation, a healthcare-focused consultancy.
The budget changes are a result of the Inflation Reduction Act, passed in 2022, to battle the increased cost of vital medicine in most Americans’ lives. In the summer of 2023, Biden’s administration announced ten prescription drugs that will be up for price negotiations under Medicare.
If passed, the Strengthening Medicare and Reducing Taxpayer (SMART) Prices Act would expand the number of drugs the government can negotiate beginning in 2028. The bill was introduced in April but has yet to make it past the Senate Finance Committee.
Even though the SMART Prices Act hasn’t seen the light of day, Big Pharma is already sounding the alarm on what it considers to be a disastrous policy mistake.
The effect of lower prices on Big Pharma
The study also found that government-mandated drug prices could reduce biopharma employment by up to 1.1 million over the next decade. California, Massachusetts, and New York could be the hardest hit.
What’s the connection between government-negotiated drug prices and job losses? The answer is less revenue for Big Pharma, which translates into fewer dollars for R&D, innovation, and employee salaries.
Most advanced countries negotiate lower drug prices for their citizens, but in the U.S., reality is much more complicated. America serves a special role in global healthcare, and that role could change if the government plays a heavy hand at the negotiating table.
The United States accounts for nearly half of the world's $8 trillion healthcare economy. Nearly 44% of all medical patents are granted to U.S.-based drug companies and researchers, according to the National Library of Medicine.
In 2019, the entire U.S. pharmaceutical sector spent roughly $83 billion on R&D, according to a Congressional Budget Report released in 2021. This figure jumped to $101 billion in 2022.
American companies spend big on R&D because there are strong financial incentives to develop the best drug treatments. In 2019, the U.S. pharmaceutical industry generated $429 billion in revenues—this figure rose by 23% to $529 billion in 2022.
By taking those financial incentives away, companies have less reason to spend billions on medical research. Or so industry advocacy groups claim.
“At a time when the biopharmaceutical industry is just beginning to experience the negative impacts of the Inflation Reduction Act’s government-mandated drug pricing policy, any new proposal only adds fuel to the fire and reinforces a deeply misguided and flawed approach,” said Tom Kowalski, national co-chair of We Work For Health, a biopharma advocacy group.
The hidden cost to Americans
Biden's plan to give more negotiating power to the government will likely make prescription drugs more affordable for families. But according to experts, it also carries hidden costs that could make American healthcare less innovative and less affordable in the long run.
Lost revenue for drug manufacturers could result in fewer dollars going to healthcare R&D, leaving everyone worse off. There are signs this is already happening.
Novartis, a Swiss-based healthcare company with a large U.S. presence, has already dropped some early-stage cancer treatments from its pipeline due to Biden’s pricing policies. Big Pharma players like Merck, Biogen, and Amgen have also warned they could do the same.
According to Tomas Philipson, a professor of public policy at the University of Chicago, policies like the SMART Prices Act “would make both the delivery of healthcare—and the cost of improved outcomes—more expensive.”
That’s because higher spending on drug innovation reduces overall healthcare costs by replacing the need for costlier care. “As just some examples, statins replace heart surgeries, Hepatitis C drugs replace kidney transplants, and antidepressants replace in-person psychology visits,” he said.
Tell that to the 18 million Americans who can’t afford essential medication because it’s too expensive. Or seniors who pay an average of $456 in annual out-of-pocket expenses because Medicare doesn’t cover the cost of their drugs.
The U.S. currently shoulders the burden of global medical innovation. This comes at a tremendous cost to Americans, who are saddled with some of the world’s largest medical debt. But the alternative could be even worse if companies decide that investing in innovation is no longer worth it.