Washington really does not get it.
The Washington Elites hatched a plan, the so so-called Build Back Better reconciliation measure, to spend $3.5 trillion of borrowed American cash and tax dollars on expanding government. They then cut down the plan by a trillion, as if that will make Americans feel better, and have been marketing it as the solution to all our nation’s problems. They have also included one provision that will cause chaos in the research, development, manufacturing, and sale of prescription drugs through Medicare.
The fact is that this Biden plan will not make one Americans life any better. This plan will not solve inflation. It will not solve the problem of unemployment and underemployment. What it will do is to spend even more cash the federal government does not have. It will also impose tax hikes that will hurt the same Americans they are promising to help.
The Biden Administration has come up with ‘Pay-Fors’ to fund this legislative monstrosity that will hurt average Americans. One element of the proposal in discussion is a tax change to the treatment of prescription drugs purchased by Medicare. This revenue raiser in the plan purports to lower prescription drug prices for Medicare recipients. Who could be against that?
When you do a deep dive into the issue, you can see this proposal will hurt the very people the government is trying to help. The Congressional Budget Office (CBO) studied a similar idea, the Lower Drug Costs Now Act, back in 2019 and concluded “the bill would immediately lower current and expected future revenues for drug manufacturers, change manufacturers’ incentives, and have broad effects on the drug market.” They see as a possible outcome that “a manufacturer that was dissatisfied with a negotiation could pull a drug out of the U.S. market entirely.” They also see a perverse incentive for drug manufacturers to hike drug prices in anticipation of a negotiation with the government. The whole plan is price fixing that will get drug pricing away from market forces and closer to a socialist system of the government determining drug prices.
The promised revenues raised by this potential new law are a gimmick to make the spending side of the plan look more appealing. The CBO projects that the current version of this idea, as offered to the reconciliation measure, would raise $581 billion over ten years. One problem with this analysis is that it is possible that a drug manufacturer would pull a drug from the U.S. market to avoid paying this tax. That would lower the revenues raised dramatically. The tax rate to force negotiation is so high as to make it unworkable in some circumstances. The provision creates a strong incentive for drug companies to pick and choose which drugs to sell in the U.S. This tax will reduce the amount of money that these companies dedicate to the invention of new drugs and will force companies to pull some drugs from U.S. markets. With this reduction in research and development, there will be less innovation. With less drugs available to Americans in need of these drugs, there will be less choice.
A big picture problem with this progressive proposal is that price controls don’t work. Government-mandated pricing runs contrary to an American free market approach to economic activity. Having a tax that forces drug companies to negotiate in a way that gives all the power to the state will lead to some lower prices, and some higher prices, but the average American consumer of drugs will see a future of less innovation. There will be an element of stagnation in the drug industry while the best and brightest might choose not to enter the field of creating new drugs. Socialism in drug pricing will lead to all the bad outcomes of a government-managed economy that we saw in the old Soviet Union and the current day Venezuela.
The sad truth is that this Medicare drug negotiation provision is nothing more than an accounting gimmick to make believe that the Biden Build Back Better plan will not cost the taxpayers anything. What we do know is that this plan will cause some drug prices to go up, others to go down and it will stifle innovation. We also know that it is likely that this plan raises nowhere near the $500 plus billion as advertised. Finally, we know that socialism does not work, and it is a bad idea to allow drug pricing to become another power of the federal government.
It is a terrible idea to include Medicare price controls in the Build Back Better plan and Congress should walk away from this harmful idea.
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