Sally C. Pipes: Price controls in Medicare will kill new cures

President Biden just released his budget plan for the next fiscal year. It purports to extend Medicare’s solvency by decades and reassure the millions of Americans who rely on the program.

But once they realize his approach will grind drug research to a halt, perhaps they’ll come to a different conclusion.

The president says he’ll reduce Medicare’s costs by expanding a provision in last year’s Inflation Reduction Act that authorizes the program’s officials to “negotiate” — that is, demand with the force of law — lower drug prices from pharmaceutical companies. This, he claims, will save billions of dollars that can be plowed back into Medicare.

Under the IRA, Medicare can subject 10 prescription drugs covered by the Part D benefit to price controls in 2026. The next year, it can add another 15 to the “negotiation” scheme. In 2028, 15 drugs from Medicare Part B, which covers drugs dispensed in a clinic, or Part D can be hit with price controls. And in 2029, the number jumps to 20 drugs.

The total savings for this scheme? Roughly $100 billion over 10 years, according to the Congressional Budget Office.

The IRA has been law for roughly seven months. The government hasn’t even announced which 10 drugs will be the first subject to price controls. Yet the Biden administration is already asking for more.

The billions of dollars in “savings” the president has earmarked for Medicare will come directly out of companies’ research budgets. Drug makers from Novartis and Merck to Bristol Myers Squibb and AstraZeneca have gone on record with warnings that they are now reassessing their investment plans. Some have explicitly called out the IRA’s price-control provisions as the reason why.

It looks like cancer treatments will be taking an especially hard hit. Eli Lilly announced in November that it would halt research into a blood cancer drug. AstraZeneca and Merck have raised concerns about how the law will affect their work in cancer research.

This slowdown in investment undermines Biden’s much-ballyhooed “cancer moonshot,” which aims to cut the cancer death rate in half over a 25-year period.

To see why the IRA has had such a chilling effect on drug research, consider how we get path-breaking medications in the first place. It takes a lot of time and money to develop a successful treatment — on average, at least a decade and up to $2.8 billion for each new approval.

Why so long and so much? Because the failure rate is exceedingly high. Only about 12% of all drugs that enter clinical trials end up gaining FDA approval.

As Ken Frazier, executive chairman of Merck put it, “Truly transformational medicines are, first of all, sporadic and spread out. They don’t happen every other year.”

In other words, drug companies end up working on a lot of losers before coming up with a winner. That can be very expensive.

So why do it? Because there’s always a chance the next drug will be a blockbuster. That possibility attracts billions of dollars in investment each year — and has enabled the United States to lead the world in the development of new drugs.

Or at least it used to. Under the IRA, that position is slipping. The president’s budget proposal would instantly erode what remains.

Congress should not only refuse to fill his misguided prescription — it should excise the price controls already in place.

Sally C. Pipes is president, CEO and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute.