Biden's costly caps

When it comes to the cost of prescription drugs, the numbers are maddening. Just ten drugs account for nearly a quarter of Medicare’s spending on prescription medicines. Meantime, Americans pay more than double the amount, on a per capita basis, that citizens of many other wealthy nations pay for drugs. So President Joe Biden’s plan to negotiate with pharmaceutical companies on the prices for those ten drugs—and a few dozen more, eventually—might seem like common sense.

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But this negotiation is neither ordinary nor reasonable. The sheer size of Medicare, which makes up most of the U.S. market for prescription drugs, means that the government is effectively acting as a monopsonist—that is, the sole buyer—and using that market power to put a price cap on drugs. These caps will produce short-term savings, but they may end up costing the government and consumers even more in the long run. …

Capping drug prices, however, may only increase costs for everyone over time, as the price ceiling will likely reduce innovation in the pharmaceutical industry. Odds are that the government will not stop at the few dozen drugs it currently has in its sights. Any pricey and popular drug could be a target for negotiation.

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