The slippery slope of price controls on prescription drugs

And so it starts. President Joe Biden has released the list of the first 10 prescription drugs — available in the Medicare Part D and Medicare Advantage programs — targeted for price controls under the Inflation Reduction Act. But this is only the first step in Democrats’ decades-long effort to control the price of virtually everything — goods, services and labor. Except, of course, the price of big government.

You will be hearing a lot of Democratic chest-thumping over the next few weeks. For example, former Speaker of the House Nancy Pelosi said, “House Democrats have been in this fight for a long, long time. Our Inflation Reduction Act marks a monumental victory in this effort: at long last, Medicare now has the power to negotiate lower prices for prescription drugs.”

And most of the media will mindlessly echo her claim. But it isn’t a “negotiation,” and was never intended to be. Bureaucrats will decide what they think is a fair price for each targeted drug, with the number of drugs growing in future years. The drug company can come back with a counteroffer. There is a little back and forth, but the government eventually tells the drug company how much it will be allowed to charge.

But what if the drug company disagrees? Can it walk away? That’s what happens in actual negotiations. Here is how the Kaiser Family Foundation describes how the “negotiations” (read: price-control) process works: “If an agreement on the maximum fair price is not reached by August 1 [2024], manufacturers may be subject to an excise tax, which will be administered by the IRS, as specified in the Inflation Reduction Act.”

So, what would that “excise tax” look like? Bloomberg Law explains: “Under the law, companies that decline to participate in the program or don’t comply with the maximum fair price ultimately set by Medicare will have to pay taxes that start at 65% of the US sales of a product. The fines would increase by 10% every quarter, with a maximum of 95%.”

In other words, if a drug company doesn’t accept the government’s set price, the company will have to pay taxes equal to 65 percent of U.S. sales of that drug. That is not 65 percent of profits, mind you — that’s 65 percent of all revenue the company receives from the sale of that drug. But it doesn’t stop there. The fine increases 10 percentage points every quarter until the government is taking 95 percent of all revenue from the drug.

So, a drug company’s options are to accept the government’s price or give the government 95 cents of every dollar of that drug’s sales. That’s not a negotiation, that’s extortion — or blackmail.

Several of the drug companies, as well as the Chamber of Commerce, are fighting back by filing suit in an effort to stop the process and let the courts weigh in. The six lawsuits that have been filed so far are arguing that these price controls violate the First, Fifth and Eighth Amendments to the Constitution.

The resolution will likely take some time and may well end up before the Supreme Court — where it is crucial that the justices slam the door shut on Biden’s and the Democrats’ price control efforts, because going after the drug companies is only the first step toward imposing price controls on products and services in the wider economy.

Their strategy has been to identify an industry that provides a widely used product and accuse the companies involved of price-gouging, then take every available opportunity to repeat the message. Enlist the media to provide a megaphone, which it will eagerly do. Then campaign on passing legislation that would stop the “greedy” companies from charging so much.

Drug companies are the current targets. But the same tactics have been used against oil and natural gas producers, health insurers, credit card companies and others. And they will be used again.

These efforts are not about achieving fair prices, and never have been. They are about having the government dictate prices to a wide range of companies and industries. They are about control, not competition, and using that control for their own benefit.

Once politicians and bureaucrats control prices, they can control the companies. The process goes like this: “What’s that, Mr. CEO, you don’t think I’m allowing you to charge enough for your product (or service)? You know, we have a committee meeting coming up. I sure hope one of my colleagues doesn’t propose lowering the set price even more. Incidentally, did I mention I am up for reelection and that I have a new political action committee?”

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him @MerrillMatthews.