Pharmaceutical Price Controls and the Marshmallow Test

The pharmaceutical market is in turmoil. On the one hand we have what looks like a golden age of medicine with millions of lives saved by COVID vaccines, a leap in mRNA technology, excellent new obesity and blood sugar drugs, breakthroughs in cancer treatments and more. On the other hand, the Inflation Reduction Act includes the most extensive price controls on pharmaceuticals we have ever seen in the United States.

In Washington-speak the “Inflation Reduction Act” requires HHS to “negotiate” drug prices for Medicare Part D and Part B to establish a maximum “fair” price. In reality there is no negotiation–firms who refuse to negotiate are hit with huge taxes. The “negotiation,” if you want to call it that, is “your money or your life” and fairness has little to do with it. The IRA also requires very costly inflation rebates, i.e. a price control/tax. In essence, the IRA is a taking; for drugs with a large Medicare market it is similar to abrogating patents to 9 years for small molecule drugs and 13 years for biologics. For the included drugs there will be a significant reduction in revenues. Moreover, we don’t yet know whether the plan will be extended to more and more drugs. There is significant uncertainty affecting the entire market. What will be situation in 10 years? Will the US be like Europe?

Reduced revenues mean less R&D. The value of extending life is very high and so in my view medical R&D is underprovided. Thus, price controls are taking us in the wrong direction.

The positive effects of price controls are immediate and easy to see: Prices are reduced.

The negative effects of price controls take time and are harder to see. Namely:

• Fewer drugs for Medicare market.
• Less research on post-approval indications and confirmatory trials.
• Reduced incentive for generics to enter quickly.
• Most importantly: Less R&D spending leading to fewer new drugs, a reduced pharmaceutical armory, lower life expectancy and higher morbidity. By one calculation, ~135 fewer new drugs through to 2039 (see also here and here and here and here).
• Fewer new drugs means more spending on physicians and hospitals so in the long run price controls may not even save money! (Most prescriptions are for generics. Drugs fall greatly in price when they go generic but physicians and hospitals never go generic!)

Price controls are a classic example of political myopia. Price controls, like rent controls and deficit financing, have modest benefits now and big future costs and thus they are supported by politicians who want to be elected now. Unfortunately, current citizens don’t forecast the future well and future citizens don’t have a vote so it’s easy to create big future costs without engaging an opposition.

The emergence of groundbreaking pharmaceuticals and the increasing implementation of price controls are probably related trends. Everyone wants the great new pharmaceuticals without paying for them. We need to think more long-term–we have much more to gain from a continuing flow of new pharmaceuticals than from lower prices on the last generation. Don’t forget that children who fail the marshmallow test do less well later in life. Well, our government is failing the marshmallow test, big time.

Pharmaceutical price controls driven by myopia and the failure to delay gratification are greatly harming future patients.