The Biden administration on Tuesday announced the first 10 medicines that will be subject to price negotiations with Medicare, kicking off a landmark program that is expected to reduce the government’s drug spending but is being fought by the pharmaceutical industry in court.

The medications on the list are taken by millions of older Americans and cost Medicare billions of dollars annually. The drugs were selected by the Centers for Medicare & Medicaid Services through a process that prioritized medications that account for the highest Medicare spending, have been on the market for years and do not yet face competition from rivals. …

The negotiation program is projected to save the government an estimated $98.5 billion over a decade. It is also expected to eventually reduce insurance premiums and out-of-pocket costs for many older Americans, though the magnitude of those savings remains to be seen.

Check at the link to see if you currently take any of these meds. If you don’t, breathe a temporary sigh of relief, as the impact of these “savings” will likely mean restricted supply down the line, as price caps do what price caps always do — create shortages and rationing.

But that will get outweighed by all of the ‘justice’ and savings, right? That’s what Biden and his administration claim, but where will the savings go? Well, they’ve already been spent. The Biden administration used these promised savings to pay for the rest of the IRA, especially its Green New Deal elements. That’s how Biden, Chuck Schumer, and Joe Manchin got the IRA squeezed through the Senate reconciliation process — by claiming these “savings” to get to a deficit-neutral position.

We haven’t saved anything, nor will price reductions show up in consumer pockets, especially those outside of CMS. Drug manufacturers will be forced to ‘negotiate’ bulk prices for CMS patients, but that won’t have anything directly to do with what prices private insurers have to pay. Biden will claim that private insurers will be able to force manufacturers to match government pricing, but it’s more likely that the pharmas will do what CMS providers end up doing — balancing their losses on Medicare and Medicaid patients by charging more for patients under private insurance.

Some may be asking: But what’s so wrong about allowing government to negotiate on prices like private insurers do? For one thing, government isn’t an equal partner in the marketplace. Government taxes and regulates this market, which means this isn’t really a ‘negotiation’ at all. It’s more of a Kabuki Negotiation Theater that allows government to leverage its regulatory and tax power to set the price where the government wants it.

Even the NYT notices it, although they bury that point toward the end:

Now that the list of drugs is public, their makers have until Oct. 1 to declare whether they will participate in negotiations with the government. Companies that decline to negotiate must either pay a large excise tax or withdraw all of their products from both Medicare and Medicaid, the federal-state program that provides health coverage to low-income people.

What exactly is the “large excise tax”? Notably, the NYT doesn’t bother to mention that, but it’s critical to understand the nature of this extortion scheme. A Congressional Research Services analysis from August 2022 reveals its draconian nature:

The excise tax rate would range from 185.71% to 1,900% of the selected drug’s price depending on the duration of noncompliance. The provision does not specify these rates explicitly, but instead defines an applicable percentage which equals the share of the post-tax sale price attributable to the excise tax. Specifically, the applicable percentage as defined in the statute equals tax/(tax+price) which simplifies to tax rate/(tax rate+1) with the applicable percentages being 65% for the sales of selected drugs during the first 90 days of noncompliance, 75% for sales during the 91st to 180th days of noncompliance, 85% for sales during the 181st to 270th days of noncompliance, and 95% for sales after the 270th day of noncompliance. Hence, the corresponding tax rates would be calculated as (applicable percentage)/(1- applicable percentage) and equal 185.71%, 300%, 566.67% and 1,900% respectively, depending on the duration of noncompliance. For example, if a selected drug was subject to the top tax rate of 1,900% and cost $10 pretax, it would cost $200 post-tax with $190 of the $200 cost (or 95%, the applicable percentage) being attributable to the excise tax.

“Noncompliance” would be ruinous, not just to the accessibility of the product for everyone — including and especially patients with private insurance — but to the manufacturers themselves. And that is clearly the intent, too: Biden and his team want to force drug manufacturers not just to negotiate with CMS but to kneel to CMS and its assessment of what constitutes a “fair price.”

Whether CMS or the White House admit it, this is a farcically dishonest mechanism to impose price controls. What do price controls do? They disconnect the rational mechanism between price and cost, and inevitably result in either shortages, rationing, or black-market sales. Biden and his team are about to take the ten most prescribed drugs on the market and create artificial shortages by making it unprofitable to produce them. Good luck on getting more of these prescriptions; doctors will likely have to find alternatives, even if they aren’t as effective, in order to make sure patients can find a steady supply.

Even worse, this will seriously damage if not destroy the R&D cycle that produces new pharmaceuticals. Drug companies spend billions of dollars on multi-year cycles to bring new medicines to market; many of them never do, and end up as total losses. On their successes, they typically get a 17-year window to profit before other companies can produce cheaper generics. If government imposes price caps on the meds today, they will have much less incentive — and capital — to risk billions of dollars on innovative new medicines. That means a decline in progress for treating diseases, especially those that may not have enough potential patients to warrant investment. We already have a problem with so-called “orphan” diseases; if this succeeds, expect that to get a lot worse.

It’s not really a laughing matter, but here’s the Monty Python sketch nonetheless. Before that, though, I speak with Phil Kerpen of American Commitment about the disastrous consequences of these “negotiations” on the latest episode of The Ed Morrissey Show podcast. The end result won’t be cheaper medicines, Phil explains, but scarcity.

 

The Ed Morrissey Show is now a fully downloadable and streamable show at  Spotify, Apple Podcasts, the TEMS Podcast YouTube channel, and on Rumble and our own in-house portal at the #TEMS page!