Photo by Piron Guillaume on Unsplash
Democrats’ price controls on medicine – part of their latest iteration of reconciliation – will not decrease costs, as Democrats claim. In fact, it will actually increase health spending by $50.8 billion, a new study shows.
The study was conducted by Tomas J. Philipson and Giuseppe Di Cera out of the University of Chicago.
Democrats try to claim the bill would give the Health and Human Services Secretary the authority to “negotiate” the price of prescription drugs on behalf of Medicare. In reality, the Secretary would simply determine the price he or she deems acceptable and impose a steep tax of up to 95 percent on companies who charge more. In 2023, the Secretary would be able to determine the prices of 10 prescription drugs. The determined price would go into effect in 2026. The number of drugs the HHS Secretary could set prices for would then increase to 15 in 2028 and 20 in 2029.
While these provisions are supposed to raise around $101.8 billion over ten years, the study estimates that total health care spending would actually increase by $50.8 billion over a 20-year period.
In short, pharmaceutical treatments tend to alleviate the need for more expensive interventions like surgeries and hospitalizations. In this way, the introduction of more medicines reduces money spent on costlier interventions, thus reducing total health spending. Because Democrats’ bill discourages the flow of new medicines, it will increase total health spending.
As the study finds, an increase in pharmaceutical sales lowered annual growth in health care spending by 4.5 percent:
“After dividing the real change in sales by the respective real change in overall spending for every year between 2001 – 2021, we find that the annual growth in domestic sales by US innovators contributed negatively to the annual growth in real health care spending. On average, real domestic sales by US pharmaceutical innovators made up -4.5% of the real increase in total health care spending from 2001 – 2021.”
Further, the study reviews numerous similar studies, concluding that the average cost offset from medical innovation, or total cost decrease, is $151.94 per new drug.
These findings fly in the face of many assumptions made about health care spending. While lawmakers tend to hyperfocus on the cost of drugs, growth in health care spending has far more to do with labor costs. The study points out that over 70 percent of overall health care spending is on labor:
“The primary source of spending in health care is on labor, such as doctors, nurses or assistants, which makes up over 70% of overall spending, similar to other US industries. Nevertheless, many lawmakers often stress that capital spending on medical products such as drugs, diagnostics, and devices is the cause of the level and growth in overall health care spending.”
The study then uses the average cost offset from medical innovation, a previous study finding that the proposal would lead to 135 fewer new drugs, and the average number of patients taking the average drug to find how much price controls would increase health spending:
“Indeed, if proposed price controls on medical innovation were implemented, the results from the summarized literature show that the average increase in total health care spending would be about $50.8 billion over a 20-year period. This value shows the dramatic effect that recently proposed legislation could have on consumers’ pockets and health outcomes.”
The intention of price controls is, supposedly, to decrease medicine costs for Medicare. Evidently, these price controls will result in more total spending on health care. Thus, price controls will create a slippery slope toward government control of health care and cost taxpayers more. Lawmakers must reject this proposal.