A Destructive Piece of Legislation
The House of Representatives should reject the Inflation Reduction Act, which will harm Americans by reducing pharmaceutical R&D and expanding needless Obamacare subsidies.
The House of Representatives will soon take up the inaptly named Inflation Reduction Act. The IRA, which cleared the Senate by the barest of margins—51 to 50—through the reconciliation process, will do little to control inflation. More importantly, its health-care provisions will harm Americans in order to fund an expansion of government-run health care that disproportionately benefits the wealthy, leads to inflation, and provides inferior care.
The highly regarded Penn–Wharton Budget Model estimated that the impact of the IRA on inflation over the next ten years would be “statistically indistinguishable from zero.” Inflation might rise slightly in the first few years and decline slightly thereafter. The CBO concurred, finding that the bill would have “negligible effect” on inflation.
The anti-inflationary effect is likely even lower since both assessments were made before the Senate parliamentarian knocked out a provision that purportedly would have saved around $40 billion. Moreover, almost half of the IRA’s projected budgetary savings ($122 billion) results from a budgetary gimmick—repeal of a Trump-era drug-rebate rule that was challenged in court, has been delayed multiple times, has never had any money spent on it, and would likely never have gone into effect. Even Senator Bernie Sanders, before voting yes, labelled the IRA “the so-called Inflation Reduction Act.”
The deception doesn’t end with the bill’s title. Despite President Biden’s assurance that no American earning less than $400,000 would pay “a single penny” in additional taxes, the nonpartisan Joint Committee on Taxation found that the IRA would raise taxes on Americans in every income bracket and that people earning less than $400,000 would bear most of the increase. In fact, the IRA appropriates $80 billion for the IRS—more than six times the agency’s annual budget—to boost enforcement and collections. The bill’s authors are counting on tens of thousands of additional tax collectors to find the money to finance the IRA’s increased spending. Their targets will not be limited to Sanders’s “millionaires and billionaires.” They don’t have enough money. Inevitably, working- and middle-class people along with small businesses and sole proprietors will be targeted—that’s where the money is.
But it is the IRA’s health-care provisions that are most troubling. These fall into two categories: drug-price controls and an extension of expanded Affordable Care Act subsidies that were scheduled to expire at the end of this year.
The drug-price provisions empower the secretary of Health and Human Services (HHS) to “negotiate” the prices of some high-expenditure, single-source Medicare drugs. But this will not be a negotiation in the usual sense of the word. Medicare purchases a large part of the overall market. This will give the secretary tremendous negotiating leverage.
In addition, the secretary is the sole arbiter of which drugs will be negotiation-eligible. The IRA specifies that there is no administrative or judicial route to dispute this selection. The statute instructs the secretary to select negotiation-eligible drugs from single-source drugs with the highest Medicare expenditures over the preceding year. But expenditures can be high because prices are high, or because large quantities—normally the sign of an effective therapy—are used. Drugs could be subjected to regulated prices precisely because they are valuable and treat large numbers of patients, regardless of whether they have unreasonably high prices. This could depress the supply of our best drugs and harm patients.
But it is in setting prices where the secretary will have most power. If a company refuses to negotiate or doesn’t agree to the price HHS sets, it will be subjected to a confiscatory excise tax of up to 95 percent of sales of the drug. In other words, you sell to us at the price we select, or you don’t sell at all.
The drug provisions also limit price increases of Medicare drugs to the inflation rate. Normally, if a drug is valuable, demand for it will rise and higher prices will elicit greater supply. But if the price is artificially limited to below a market clearing price, there will be shortages of the most effective medications.
Moreover, these inflation price limits will, according to the CBO, elicit higher launch prices for new drugs because manufacturers will no longer be confident of their ability to raise prices subsequently to match market conditions. The result will be higher out-of-pocket payments—normally based on list prices—for insured patients and higher prices for patients who lack drug coverage and must pay list prices. Some patients will forgo valuable new treatments because of increased costs.
The IRA imposes new $2,000 limits on total out-of-pocket costs in Medicare Part D and a $35 cap on copayments for insulin. These limits will translate into higher premiums that taxpayers and beneficiaries will share—and they are not linked to patients’ incomes. Why are limits necessary for wealthier patients who can easily afford higher out-of-pocket costs? Any sort of limitations should be tied to incomes.
The fact is, these price controls are not needed. While pharmaceutical critics point to high list prices, particularly for specialty drugs and new biologic agents, the actual prices paid for medicines after various discounts have been relatively stable. The latest government figures show that year-to-year prescription-drug price inflation, accounting for discounts, is 2.8 percent, less than a third of the 8.5 percent general inflation rate. Total drug spending growth has been stable the last 15 years and has been lower than the growth in health-care spending. U.S. drug spending as a percentage of health expenditures is lower than the average percentage of eleven developed countries.
While high prices of a few branded, specialty medications get lots of media attention, aggressive price competition has led Americans to switch from branded drugs to generics for most of their medicines. U.S. patients use more generics (nine out of ten prescriptions) and pay less for them (an average of 16 percent less) than patients in other developed countries. This enhanced competition resulted in pharmaceutical prices declining in 2018 for the first time in decades and staying relatively stable since.
Regardless of whether drug prices are too high, it is indisputable that the IRA’s price controls will lessen the number of innovative, life-saving, new drugs that ultimately become the low-priced generics most Americans use. Numerous academic studies have demonstrated a significant negative relationship between drug-price controls and investment in pharmaceutical research and development and access to new drugs. The Council of Economic Advisers estimated that an earlier version of the IRA’s price controls—H.R. 3, the Lower Drug Costs Now Act of 2019—could keep 100 new, life-saving drugs from Americans over the following decade and reduce Americans’ average life expectancy by an estimated four months. University of Chicago economist Tomas Philipson estimated that the earlier draft of a second version of the IRA’s price controls in the Build Back Better bill could result in a 29 percent to 60 percent reduction in R&D and 167 to 342 fewer new drug approvals over the next 20 years.
Estimating the reduction resulting from the IRA is harder since the bill has undergone so many recent changes, but it will undoubtedly be substantial. One estimate is that pharmaceutical revenues would decrease by 10 percent to 15 percent. If R&D expenditures parallel revenues, that would translate into 130 to 195 fewer drugs of the approximately 1,300 new drugs expected over the next 30 years. A review of academic studies found that, on average, a 1 percent reduction in pharmaceutical revenue leads to a 1.5 percent reduction in R&D activity. Using the same modest decreased revenue estimates would translate into 195 to 293 fewer drugs. Fifty percent of products in the development pipeline are cancer drugs. President Biden—who has repeatedly championed his “cancer moonshot”—might want to consider how many life-saving cancer drugs we will lose before signing the IRA.
The second category of health-care provisions in the IRA is a three-year extension of expanded Affordable Care Act subsidies, due to expire at the end of 2022. The ACA provided subsidies, primarily through premium tax credits, to people with incomes between 100 percent and 400 percent of the federal poverty level (FPL) and limited the amount a person could pay for a benchmark insurance exchange plan to a percentage of their income—a fraction that increased with rising incomes—with subsidies paying the difference. No subsidies were available for people with incomes above 400 percent FPL.
The March 2021 American Rescue Plan boosted subsidies for people who were already eligible by lowering the maximum percent of income they were responsible for, and it expanded eligibility by eliminating the upper income limit of 400 percent of the FPL.
These expansions were never really necessary. The Biden administration claimed expansion was needed to cover people who, because of the pandemic, lost employer coverage, were struggling to pay premiums for coverage they maintained, or were uninsured and could not afford care. Yet the source the White House cited for lost employee coverage—a Kaiser Family Foundation policy brief—noted that declines in employer-sponsored insurance were far less than declines in employment. In fact, the number of uninsured had not gone up. Approximately 75 percent of the enhanced subsidies went to people already insured at a cost of $30 billion in 2022.
These expanded subsidies amount to welfare for the wealthy. Eliminating the upper-income limit ensured that the greatest benefit—reduced net premiums—went to people with incomes over 400 percent of the FPL ($111,000 for a family of four), people who are older and therefore had higher premiums, or people living in areas with higher premiums. In 2021, for example, an average family of four headed by a 60-year-old with an income eight times the FPL qualified for a subsidy of more than $12,000. In some areas, households with incomes of more than $500,000 qualify for subsidies.
Unsurprisingly, the CBO estimates that 40 percent of additional enrollees were people with incomes above 400 FPL. Is there any reason these wealthy individuals and households should get subsidies?
The enhanced subsidies also worsen the inflationary structure of the ACA subsidy program. Since the subsidy structure limits an individual’s responsibility to a percentage of his income, insurers have little incentive to temper their premium increases, which will be picked up by the federal government. Predictably, premiums and subsidies for exchange plans are rising faster than CBO anticipated.
While the original subsidy expansion was limited to two years, expiring at the end of 2022, it seems clear that ACA advocates intend to make the expansions permanent. The Build Back Better bill proposed extending the expansion for two years. This changed to three years in the IRA. It is highly likely that two to three years from now, legislators will move for additional extensions. Sooner or later, employers, convinced that the expanded subsidies are here to stay, will stop offering health-care coverage, forcing their employees off of high-quality group plans with a wide range of choices and into lower-quality exchange plans with limited provider networks.
The current limited extension is designed to disguise the costs of the enhanced subsidies. But CBO estimates that making the increased subsidies permanent would increase deficits by $248 billion over the next ten years.
In sum, the Inflation Reduction Act is an attempt to expand government control over medical care. It will not reduce inflation but will harm Americans by reducing pharmaceutical R&D, resulting in fewer lifesaving, innovative drugs—and thus, reduced life expectancy and quality of life. It will also perpetuate an unnecessary, inflationary expansion of ACA subsidies that primarily benefit the wealthy.
The House of Representatives should reject this destructive legislation.
Photo by Drew Angerer/Getty Images
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