New Analysis Warns Drug Price Controls Could Raise Long-Term Costs

A new analysis of federal prescription drug price controls finds that policies intended to lower costs today could result in higher drug spending over the long term by discouraging generic and biosimilar competition.

Writing in RealClearHealth, University of Chicago economist Tomas J. Philipson argues that the prescription drug price controls enacted under the Inflation Reduction Act could weaken the competition responsible for some of the largest reductions in drug prices. His analysis finds that lower revenues for price-controlled medicines could make those markets less attractive to generic and biosimilar manufacturers after patent protections expire.

The Center for a Free Economy agrees with Philipson’s assessment. Policymakers should focus on reforms that lower prescription drug costs through greater competition and by confronting foreign government price controls, rather than expanding domestic government price setting.

Price Controls Could Discourage Future Competition

Philipson and his University of Chicago colleagues examined the first 25 medicines selected for Medicare price setting under the Inflation Reduction Act. Their analysis estimates that government-set prices will reduce net prices for those medicines by about 37 percent while they remain protected from generic or biosimilar competition.

Those immediate savings, however, do not account for how manufacturers may respond once market exclusivity ends.

Generic prices typically decline as more manufacturers enter the market. According to the analysis, a generic medicine with one competitor costs about 79 percent of the former brand-name price on average. With 10 or more competitors, that figure falls to about 16 percent.

Reducing the value of a market before generic and biosimilar competition begins can change the economics of entering it. Philipson’s analysis projects 38 percent fewer generic and biosimilar entrants for the first 25 medicines subject to Medicare price setting. The resulting reduction in competition would leave post-exclusivity prices 45 percent higher on average.

Over the 35 years following implementation of the price controls, the analysis estimates that average prices for those medicines could be 21 percent higher than they otherwise would have been.

CFE Has Long Opposed Government Drug Price Setting

The findings are consistent with concerns CFE has raised since Congress considered the Inflation Reduction Act.

CFE joined a coalition of conservative and free market organizations opposing the law’s prescription drug price controls, warning that government price setting could discourage investment in new medicines, reduce patient access, and weaken the competitive forces that lower costs over time.

Rather than expanding domestic price controls, policymakers have several alternatives that can address prescription drug costs while preserving competition and innovation.

One is the USTRx Act, which would strengthen the ability of the Office of the U.S. Trade Representative to challenge foreign government policies that suppress the prices paid for innovative medicines. CFE helped lead a coalition of more than 40 organizations supporting the legislation as a way to confront foreign freeloading instead of importing foreign price controls into the United States.

The Trump administration has taken a similar approach through trade policy. USTR has launched a Section 301 investigation into Germany’s pharmaceutical pricing practices, examining whether German government policies discriminate against American pharmaceutical innovation or burden U.S. commerce.

The administration has pursued lower costs for American patients through TrumpRx.gov as well. The initiative provides access to discounted prescription drug prices negotiated with manufacturers, offering another approach to reducing costs without expanding the Inflation Reduction Act’s domestic price-control regime.

CFE Takeaway

Philipson’s analysis highlights an important weakness in the case for government drug price setting. Lower prices imposed today can carry longer-term costs if they discourage the generic and biosimilar competition that produces substantial savings after market exclusivity ends.

Policymakers should instead pursue reforms that strengthen competition, confront foreign drug price controls, and give American patients greater access to lower-cost medicines. Advancing the USTRx Act, challenging discriminatory foreign pricing policies, and expanding market-based options such as TrumpRx offer a better path than extending federal price controls.