Much has been written about the expansiveness of the Biden administration’s signature priority: the Build Back Better Act (BBB). The legislation is projected by the Congressional Budget Office (CBO) to spend more than $1.6 trillion in its attempts to address countless Democratic priorities ranging from climate change to the expansion of Medicaid.
One aspect of the bill, however, has attracted far less fanfare than it should have: its impact on the cost of prescription drugs.
Provisions in the bill would, among other things, impose rebates on drug manufacturers if prices rise faster than inflation. It’s an idea that sounds great in the current moment of creeping inflation, but is ultimately little more than a market distortion likely to produce an array of adverse consequences.
A new University of Chicago study looked at the impact of the bill on “innovation and patient health” and found that BBB would reduce spending on drug research and development by “about 18.5 percent.” It concludes that such a reduction might limit research and development, potentially leading to 135 fewer new drugs.
Perhaps most damning, the study also concluded that the corresponding drop in drug production would result in a loss of 331.5 million life years — a number 31 times larger than the life years lost in the United States as a result of COVID-19. That’s presumably not the outcome that Democrats had in mind.
But their proposal doesn’t just impact the market for new brand-name drugs. It also would undermine access to affordable generic and biosimilar medicines already approved by the Food and Drug Administration (FDA).
In addition to the inflation rebates, BBB seeks to cap Medicare drug prices by limiting how much the program will pay for prescriptions. While negotiation with manufacturers would result in some savings to the program — $79 billion over 10 years according to the latest CBO estimate — it also would create complications for generics manufacturers, who are critical to keeping prescription costs low in the first place. As another commentator highlights, “requiring Medicare to negotiate drug prices would upend private-sector negotiations” that are already occurring.
As the Wall Street Journal editorial board recently pointed out, under BBB, “branded drugs will also see less generic competition, which will result in higher prices.” They further note that generics on average reduce prices by 30 percent — and once there are four generic entrants in a market, prices drop by nearly 80 percent.
This observation is consistent with past analysis by the FDA, which has broadly found that “greater competition among generic drug makers is associated with lower generic drug prices.”
In other words, the more generics manufacturers there are in the marketplace, the more savings for consumers and government alike. Likewise, legislation that threatens such competition ultimately will increase drug prices.
The rise of affordable generics is one of the great healthcare success stories of the last decade. It’s a trend that has not only provided quality medication for those who need it, it has also benefited programs like Medicare at a time of otherwise rising healthcare costs.
With inflation and supply chain difficulties continuing to threaten the robustness of the post-pandemic recovery, it’s more important than ever that lawmakers pay close attention to the full implications of their policy proposals. Passing along costs and sticking it to drug companies may appeal to populists on both sides, but Americans are unlikely to come out ahead should such misguided policies become law.
Prescription drug reform is one of the few areas where there is genuine bipartisan agreement not only about what policy goals should be, but about the best ways to improve access while keeping costs down. The Biden administration should listen to that consensus and rethink their latest proposal.
Jonathan Bydlak is director of the Governance Program at the R Street Institute, a center-right think tank.
