Democrats’ drug pricing plan is the wrong prescription for inflation

Gas prices are high, everyday household goods are growing more expensive and grocery store receipts are increasingly painful to look at. Inflation’s sting has hit seemingly every corner of our economy, some worse than others.

But one category that seems to have escaped inflation (at least for now) is drug prices, not that you can tell from the policies being championed by President Joe Biden and congressional Democrats. Their plan for prescription drugs is not a serious way to address today’s crisis and, worse, would create other ills.

Democrats are proposing an idea that has been favored by the party for quite some time. Under Medicare Part D — a program that helps seniors afford prescription drugs — the federal government would get to set the prices for certain drugs. 

To enforce the prices, manufacturers who do not comply would face an excise tax on drug sales of up to 1,900 percent. Imagine a drug with a normally stated price of $100 — it would face an additional tax of up $1,900 if the manufacturer did not agree to the government-set price. The excise tax penalty is extreme enough to make all manufacturers either comply with the lower prices or pull a particular drug out of the U.S. market entirely, so no new tax revenue would actually be raised.

But, under the proposal, government-set prices would lead to lower costs for certain drugs, and over time, spending by the federal government and some private payers would fall as a result.

Letting the government set the price for certain drugs is being heralded as a way to address inflation, but according to data from the Labor Department, prescription drug prices have only risen 2.2 percent over the past 12 months and even experienced a decline from February to March this year. Drug price inflation was below average inflation levels over the past four years.

In other words, prescription drugs are not the driver of the high inflation we’re currently seeing.

Worse yet, the Congressional Budget Office (CBO), Congress’s nonpartisan scorekeepers, concludes lower drug prices would also lead to less research and development (R&D).

What does lower R&D mean? Fewer new drugs can make it to market, such as breakthroughs or advancements for some of our rarest diseases. New specialty drugs lead to improved health outcomes and longer life spans. The nonpartisan CBO again: “The overall effect on the health of families in the United States that would stem from increased use of prescription drugs [due to lower prices] but decreased availability of new drugs is unclear.”

Advocates for drug price controls often point overseas for justification for such a policy. But research has shown that government-set prices in Europe resulted in an exodus of R&D spending and research jobs, delays for consumers to access drugs, and new medicines being completely forgone. The European Union traded long-term economic and scientific advancement — which help not just their patients but patients worldwide — for short-term savings on some existing drugs.

Europe lost some of the best, most cutting-edge jobs in the world to other countries. If the U.S. were to follow suit, where might our country’s R&D activity move to? The answer is other countries where innovation in life sciences is being treated more seriously, most crucially, China. The benefits of having life-saving advancements happen here, in the U.S. — for the sake of our patients and to remain global leaders in health care innovation — cannot be overstated.

Policy choices matter, and especially with a corner of the market so vital to our lives, livelihoods and longevity, the policies Washington implements need to be looked at from every angle to see if the trade-offs are worth it. 

When it comes to Build Back Better’s approach to drug pricing, the picture is clear: Government-set prices on a few drugs now — enforced by the threat of extremely high excise tax rates — would lead to less innovation, fewer medical breakthroughs and a stronger chance of competitors like China finding next big cure. 

Erica York is a senior economist at the Tax Foundation, a think tank in Washington, D.C. You can follow her on Twitter @EricaDYork