The ‘Inflation Reduction Act’ Is Nothing More Than A Handout To Big Pharma

Kenneth SchruppAugust 31, 2022

The “Inflation Reduction Act,” which analysis projects will actually increase inflation, is full of the typical prescription drug cost “solutions” offered by Beltway think tanks: allowing Medicare to “negotiate” the cost of a handful of drugs each year, capping prescription drug price increases, and limiting out-of-pocket prescription drug spending. Democrats are using populist rhetoric to conceal how these measures will raise prescription drug prices and thereby artificially enrich the pharmaceutical companies that are some of the Democratic Party’s largest donors — all while leaving everyday Americans to pay the bill under the threat of another 87,000 armed IRS agents.

At first glance, allowing Medicare to negotiate the cost of drugs seems like a pro-market rather than pro-monopoly move, even if the Congressional Budget Office estimates spending on the negotiated drugs will save taxpayers just 2.5 percent on Medicare drug spending over the next decade. But this isn’t “negotiation” in the colloquial sense — with the ill-named Inflation Reduction Act, “negotiation” means accepting the price tendered by Medicare, counter-offering, or, if no agreement has been reached by the end of the two-year “negotiation” period, facing taxes of 65 percent to 95 percent on drug sale income.

If you’re thinking, “that sounds a lot like price controls,” that’s because it is.

By authorizing Medicare to “negotiate” 10 drugs per year starting in 2026 and up to 20 starting in 2029, there’s no question that this legislation will force pharmaceutical companies to jack up the prices of every other drug they have before those too become eligible for “negotiation.”

As one drug pricing data firm CEO put it, by authorizing this price control system, “you give opportunity for the market to calibrate its prices in preparation for the negotiation.” In other words, pharmaceutical companies are going to push prices as high as they can for as long as they can.

So what kind of price increases should we expect? This legislation includes a provision to cap Medicare prescription drug price increases at the rate of inflation, which over the past two years combined has been 14.5 percent. For reference, even with high inflation and high demand for drugs, prescription drug prices rose 2.5 percent over the past two years. Amid the expectation that profits could be curtailed significantly after seven to 11 years for each drug, one would expect pharmaceutical companies to increase prices as much as allowed every year until their drugs are selected for “negotiation” — far higher than the 2.5 percent increase we’ve seen since 2020.

If “negotiations” still sound like a bad deal for pharmaceutical corporations, don’t worry — Democrats included a mile-wide loophole for avoiding “negotiations” entirely. Under this new law, any new formulations of otherwise qualifying drugs restart the entire “negotiation” eligibility timer. Facing a huge loss in profits? No problem, just make a minor molecular tweak and throw that drug right back on the market at a higher price than before.

Now, these changes could make the average Medicare beneficiary’s out-of-pocket prices skyrocket out of control and cause some serious political blowback. As expected, however, there’s an Inflation Reduction Act provision for that as well: By capping annual out-of-pocket expenditures for Medicare beneficiaries at $2,000, the average beneficiary might not even notice the increase in drug prices — with seniors taking an average of five drugs (seven for those in nursing homes) that each can cost an average of $6,604 per year ($33,020 total), taxpayers are already picking up the vast majority of the tab. Though capping out-of-pocket expenditures does limit the direct spending by elderly Americans, what this measure really does is empower pharmaceutical companies to charge and make as much money as they can while passing the buck to American taxpayers.

Naturally, this isn’t the first time Democrats have used price caps to funnel money to their health care industry donors. Remember 2010’s “Affordable” Care Act (ACA), or Obamacare? One of the key ACA components was capping premiums and health care costs at no more than 8.5 percent of household income for mid-tier “silver” plans, leaving taxpayers with the rest of the tab — this out-of-pocket cap is universal and applies to all households, regardless of income. In addition to the 8.5 percent cap, premium subsidies are available for households making up to $111,000. This means ACA customers pay only an average of 15 percent of premium costs, with taxpayers picking up the rest — today, ACA customers receive an average monthly subsidy of $505 per individual against an average monthly ACA premium of $585 per individual. Adjusted for inflation, premiums have risen 169 percent since the full adoption of ACA health care plans in 2014 when ACA monthly premiums averaged just $276 per individual.

As stated in a 2022 Bloomberg analysis of the ACA, “subsidies help make marketplace plans more affordable, but they also enable the health-care industry to continue underlying price increases that have long grown faster than inflation while the government and taxpayers pick up the tab.” Given that the three aforementioned measures follow the same logic as the ACA, this law will induce the same consequences, inflating the coffers of the very prescription drug companies the bill purportedly seeks to rein by obliterating any incentive for cost savings by health care users, doctors, or drug companies.

Per usual, the 730-page Inflation Reduction Act is nothing short of a Democrat bait-and-switch that uses a popular cause to reward party insiders at the expense of everyone else and future generations, transferring even more wealth from younger, already economically “cursed” Zoomers and Millennials struggling to afford basic expenses to multinational corporations and the wealthiest generation in our nation’s history. Americans, rather than glibly believing Democrats are here to reduce crippling health care costs, must wake up to the fact that Democrats are not their allies, but the architects of the health care monstrosity bankrupting our country and bringing our citizens to their knees.

Kenneth Schrupp is a Young Voices contributor writing on the intersection of business, politics, and media. He’s a public affairs consultant and serves as editor in chief of the California Review, an independent political journal.