Democrat Bill Imposes Price Controls and 95% Excise Tax on Medical Innovation

The Democrat multi-trillion dollar tax and spend bill includes a 95 percent excise tax and price controls on American medical innovation. This proposal mirrors H.R.3, legislation pushed by House Speaker Nancy Pelosi (D-Calif.) and progressive lawmakers.

This proposal allows government bureaucrats to impose price controls on up to 20 medicines in Medicare Part B and Part D. If the manufacturer does not accept this government set price, they are hit with a 95 percent excise tax on the total revenues of the drug. The proposal also includes an inflationary rebate penalty on every medicine in Medicare Part B and Part D.

While supporters of this proposal falsely conflate the proposal with allowing the government to “negotiate,” this plan will actually undermine the market-based structure of Medicare Part D harming patients, manufacturers, and the American healthcare system. While it is imposed on a small group of medicines, it creates a new tax and regulatory structure that can be expanded to all cures and to the entire healthcare system and become a stepping stone toward socialized healthcare.

Price Controls Should Not be Conflated with “Negotiation”

Supporters of government price controls on American medicines routinely characterize this plan as allowing the government to negotiate with the private sector. This is misleading because there is already negotiation and competition in Medicare Part D.

Part D facilitates negotiation between pharmacy benefit managers (PBMs), pharmaceutical manufacturers, and plans. This system works because Congress created a non-interference clause when Part D was created, which prevents the secretary of Health and Human Services (HHS) from interfering with the robust private-sector negotiations.

Since the law’s enactment, the program has proven to be a successful model of healthcare by saving taxpayers billions of dollars and granting patients access to medicines at low costs. Under this system, plans are free to compete based on the goal of maximizing access and minimizing coverage costs.

Federal spending on Part D has come in 45 percent below projections and is just 14 percent of total Medicare spending. Average monthly premiums in 2019 were just $32.50 and have been stable since 2011. Part D spending also helps keep costs in the rest of Medicare down – it has decreased hospital admissions by 8 percent, resulting in $2.3 billion in annual savings. 

According to a 2020 survey, 84 percent of seniors found their Part D premiums affordable and 93 percent found their plan convenient to use. 9 in 10 seniors are satisfied with the Part D drug coverage.

The Proposal Imposes a 95 percent, Retroactive Excise Tax on Hundreds of Medicines

The legislation enforces its price controls through a 95 percent, retroactive tax . This tax is imposed on the sales of a drug if the manufacturer does not agree to government-imposed prices. The tax starts at a 65 percent rate, increasing by 10 percent every quarter a manufacturer is out of “compliance.”

This tax is concerning for a number of reasons. It is imposed at such a high rate that it will result in income taxes above 100 percent of income even if applied to a portion of a business’s sales.  In addition, it is imposed on sales, not income. Businesses are typically taxed on their income as it allows them to deduct expenses such as wages and other employee benefits, equipment, and machinery. A tax on sales is imposed irrespective of whether a business made any money. 

H.R. 3 contained a more expansive version of the 95 percent excise tax. It was imposed on up to 250 medicines. Over time, Democrats will undoubtedly push to expand the tax to more and more medicines.

The Proposal Could Cost High-Paying Jobs Across the Country

President Biden has repeatedly promised to create millions of new high paying manufacturing jobs in America. However, H.R. 3 would threaten existing jobs by imposing taxes and price controls on American businesses.

Nationwide, the pharmaceutical industry directly or indirectly accounts for over four million jobs across the U.S and in every state, according to research by TEconomy Partners, LLC. This includes 800,000 direct jobs, 1.4 million indirect jobs, and 1.8 million induced jobs, which include retail and service jobs that are supported by spending from pharmaceutical workers and suppliers.

The average annual wage of a pharmaceutical worker in 2017 was $126,587, which is more than double the average private sector wage of $60,000.

Existing Part D Negotiation Already Protects Against Price Increases

The inflationary rebate penalty requires a manufacturer to pay a “fee” to the government if they increase the price of a medicine faster than inflation. In effect, this establishes a private sector ceiling or cap on the amount by which the price of a medication increases.

The government has no business dictating changes in price. There are many reasons the price of a product increases – whether that is through supply chain issues, labor shortages, or an increase in production cost.

Perversely, the inflationary rebate penalty could create an incentive for manufacturers to automatically increase the list price of their drugs each year to keep pace with inflation. 

While inflation is hitting American families hard, the cost of medicines is actually decreasing. Prescription drugs have decreased by 1.6 percent on an annualized basis over the past 12 months, according to the Bureau of labor statistics. By comparison, the Consumer price index has increased by 5.4 percent over the same period. Many household goods and services have increased even more. For instance, gasoline has increased by 42 percent, meat has increased by 12.6 percent, furniture and bedding has increased by 11.2 percent and used cars and trucks have increased by 24.4 percent.

There are already mechanisms in Medicare Part D that keep costs down. For example, pharmacy benefit managers and manufactures negotiate “price protection rebates.”  Under these agreements, any price increase past a predetermined threshold results in increased rebates from the manufacturers to the PBM. Today, almost 100 percent of medicines are subject to these rebates.

This Proposal is a Step Closer to Socialized Healthcare

Progressives are pushing proposals to expand the power that government has over the healthcare system like “Medicare for All” and the public option. These proposals also heavily rely on price controls on the healthcare system. Giving federal bureaucrats the ability to set prices in Medicare Part B and Part D would be a step toward this goal.

Imposing price controls are a key tool toward socialist healthcare because they allow the federal government to forcefully lower costs in a way that distorts the economically efficient behavior and natural incentives created by the free market.

When imposed on medicines, price controls suppress innovation and access to new medicines. This deters the development and supply of new life saving and life improving medicines to the detriment of consumers, patients, and doctors.

If the left had their way, government would control the entire healthcare system, an outcome that would also result in significant tax and spending increases and the loss of existing coverage for millions and millions of Americans.

It would lead to health care rationing, which occurs in other nations that have socialized health care, such as Canada and the United Kingdom. In the UK, there was a shortage of 10,000 doctors and 43,000 nurses in 2019, with 9 in 10 managers in the National Health Service saying that too few doctors and nurses presented a danger to patients. At any one time, 4.5 million patients were waiting to see a doctor or receive care.

France has been forced to make significant spending cuts to its “free” socialist healthcare system and there have been significant shortages of basic supplies. Australia has also experienced problems with shortages of medicines and healthcare professionals.