The comically misnamed Inflation Reduction Act imposed government price controls on prescription drugs by replacing the old non-interference principal, which used market-average prices to set drug reimbursement, with a scheme that allows the Secretary of Health and Human Services to directly set prices via a sham negotiation, in which the manufacturer has to agree or face a punitive seizure via a tax equal to 95% of the product’s total sales.
A system like that undermines the return on the multi-billion-dollar investment required to develop a new drug and bring it to market, resulting in fewer new cures and treatments. It’s a mistake, and it’s hard to think of how a policy like that could be made worse. And yet the Biden administration managed to do it. They made the price control regime much worse in practice than it was on paper, and while the short-term prospects for repealing the law are dim, the Trump administration can and should take immediate actions to reverse several specific Biden blunders.
Former President Joe Biden’s Center for Medicare and Medicaid Services, which was tasked with implementing the scheme, expanded its scope by ignoring some of the statute’s clear lines in at least three ways:
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First, drugs with biosimilar (the term for generic biotech drugs) competition were supposed to be exempt, because they already face intense price competition and because patients and plans that don’t want to pay for the brand drugs have a ready alternative. But the Biden CMS not only ruled that such drugs are subject to the price control regime, but also used the prices of biosimilars as comparators to justify more stringent price controls.
Second, Biden’s CMS took words that do appear in the statute — “therapeutic alternatives” — and used them, without public comment, to build an entire pricing system that appears nowhere in the statute. They used the pricing of old-style chemotherapy agents as a benchmark for cutting-edge complex cancer drugs and other unrelated therapies. That move justifies draconian price controls on breakthrough cures, undermining the incentive to develop and bring them to market.
Finally, Biden’s CMS also bundled two insulins approved 17 years apart and called them one drug to qualify for the minimum sales threshold and drag them into the price control regime. Neither product qualified on its own. This dangerous precedent presents the risk that nearly any drug could be dragged into the price control regime via a bundling back-door, further reducing the incentive to develop drugs, especially drugs for rare diseases that would otherwise target niches narrow enough to escape the program’s reach.
Aggregate small-molecule investment by smaller biotech companies has already fallen by 68% since the IRA passed. Investment targeting Medicare-aged populations dropped 74%. The drugs that will not be developed are the ones today’s seniors would have used tomorrow.
It’s mystifying that the Biden team that drafted and implemented the guidance that made the so-called Medicare Drug Price Negotiation Program worse remains largely intact, while the program they created remains untouched. A proposed rule released on June 12 would codify the Biden-era guidance into law.
President Donald Trump and CMS Administrator Mehmet Oz should act immediately: Halt Round 3 of price control “negotiations” before prices are set under Biden-era rules. The same “program instruction” authority that the Biden CMS used to build this system gives the current administration the power to pause or modify active negotiations. No statutory change is required. Announce that Round 4 selections will not move forward under the old methodology. Modify the proposed rules to restrict “therapeutic alternatives” to clinically appropriate, substitutable drugs only. Restore the market-based competition criteria and define qualifying single-source drugs in accordance with the statute’s plain meaning. Terminate or reassign Biden-era personnel driving the program.
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To be clear, we don’t think a price control system can be made beneficial, or even benign. We support policies that would encourage more new cures and treatments while lowering costs to patients. This includes fundamental FDA reforms to make it less expensive to bring new drugs to market, pro-growth tax policies to encourage investment in new cures, strong global protection of intellectual property and American interests, and direct-pay sales channels as an alternative to opaque insurer/PBM schemes.
But as long as the IRA is on the books, CMS must not expand its destructive impact further, and that starts by getting rid of Biden policies and personnel.
Steve Moore is co-founder of Committee to Unleash Prosperity and an expert on the intersection of law, economics, and public policy formation. Phil Kerpen is president of American Commitment and Principal at Committee to Unleash Prosperity.