Paragoninstitute.org Reforming government. Empowering patients. 703.527.2734
1
July 27, 2022
Reconciliation Bill: Misguided Drug Price
Controls and Unwise Health Insurer Subsidies
Fewer Treatments for Patients and More Money for the Wealthy
By Brian Blase, Joel Zinberg, and Drew Keyes
As Americans face rising inflation
i
and recession risk,
ii
Congressional Democrats have proposed a misguided
budget reconciliation bill focusing on health care. The
legislation would set price controls on prescription
drugs and limit price increases to the rate of inflation.
It would extend elevated Affordable Care Act (ACA)
subsidiesenacted under the American Rescue Plan
and set to expire after 2022for at least two more
years. The legislation purports to reduce the deficit, but
much of the “paper” savings result from the budget
gimmick of repealing a Trump-era drug rebate rule that
has been challenged in court, delayed by the Biden
administration, and will likely never go into effect.
The reconciliation bill would harm patients and
taxpayers. The drug price controls would decrease the
number of innovative drugs developed, thereby
diminishing Americans’ quality and length of life. The
insurance subsidies would expand federal spending
without enacting any meaningful reform to a broken
system. Critically, both proposals would incite
inflationary pressure when inflation is already at a 40-
year high.
Drug Price Controls
The reconciliation proposal would address drug prices
in three ways.
iii
First, it would allow the Secretary of
Health and Human Services (HHS) to “negotiate”
prices for a limited number of prescription drugs.
Second, it would require drug companies to pay
rebates if they increase their Medicare and commercial
prices faster than inflation. Finally, the bill would limit
Medicare beneficiaries annual out-of-pocket Medicare
Part D drug costs to $2,000.
This bill is the third recent Democratic drug pricing
proposal. Each allows the HHS Secretary to directly
“negotiate” with drug makers by revoking the provision
in the Part D statute that prohibits the HHS Secretary
from interfering in negotiations between private Part D
plan sponsors and drug makers. Currently, in Part D,
insurers compete on benefits and prices and negotiate
discounts to keep costs down, and costs have
consistently been below projections.
KEY TAKEAWAYS
The reconciliation bill would harm patients and lower
American life expectancy and the quality of life by
reducing pharmaceutical investment and the number
of innovative, life-saving drugs.
The reconciliation bill would induce drug shortages
and higher launch prices for some medications.
The reconciliation bill would benefit the wealthy and
health insurers with much higher ACA subsidies.
The reconciliation bill would increase inflationary
pressures by replacing private spending with
government spending.
The reconciliation bill includes major budget
gimmicks, making it unlikely to reduce federal deficits.
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Reconciliation
In reality, there would be no meaningful negotiation
under the Democratic proposal. The secretary would
have all the negotiating leverage. The proposal states
that the Secretary’s determination of negotiation-
eligible drugs would not be subject to administrative or
judicial review. And companies that fail to negotiate to
the Secretary’s satisfaction or adhere to the
Secretary’s set price would be subjected to
confiscatory penaltiesan excise tax up to 95 percent
of sales of the drug. The Secretary would be making
price offers that manufacturers could not refuse.
Bad Policy for an Overstated Problem
The legislation builds on the commonly held
misconception that prescription drug prices are rapidly
increasing. The legislation’s proponents have focused
on increases in drugs’ list prices. While small numbers
of patients bear a disproportionate burden from list
prices, the “net” prices most Americans pay after
rebates and discounts are considerably lower.
General inflation is alarming: prices are up 9.1 percent
over the past year.
iv
Yet even in this period of supply
chain disruptions and widespread shortages, drug
inflation is up just 2.5 percent year-to-year.
In fact, total drug spending growth has been stable the
last 15 years and has been much lower than the growth
in health care spending.
v
Low drug price inflation is the
result of rebates, discounts, and increased drug
approvals, especially generics that increase
competition. While prices of a relatively few branded,
specialty medicines are extremely high, Americans use
more generics (9 out of 10 prescriptions) and pay less
for them (16 percent lower on average) than patients in
other developed nations.
vi
Shortages and Higher Launch Prices
The proposal would also require manufacturers to
rebate price increases on their Medicare and private
market drugs that exceed general inflation. Setting
artificial caps on price increases would distort market
mechanisms that reflect the value added of a drug.
Price increases for drugs with high or growing value are
a signal to producers to increase supply. Limiting that
increase could result in shortages that impair some
patients’ health.
The Congressional Budget Office (CBO) analyses of
these types of inflation controls have said they might
induce higher launch prices for new drugs.
vii
Currently,
manufacturers might temper their launch prices for a
variety of reasons, including to gain market share or to
aid a vulnerable patient population, if they are
confident of being able to subsequently raise prices to
match market conditions. But with the proposed limits
on price increases, manufacturers would be less likely
to moderate launch prices. This would likely increase
list prices and possibly even net prices for some new
drugs. This could result in higher out-of-pocket
paymentsnormally based on list pricesfor insured
patients and higher actual prices for patients without
drug coverage who are stuck with list prices. Some of
these people will end up forgoing treatments because
of increased costs.
This would affect the very drugs that are the most
innovative and valuable for improving health. For
example, new gene therapies may yield a cure for
sickle-cell disease. The disease disproportionately
affects low-income and minority populations. Higher
launch prices might put these life-saving treatments
out of reach for these vulnerable populations.
A Faulty Methodology that Could Harm Patients with
High Use Drugs
The proposal would direct the HHS Secretary to
negotiate the price of sole source drugs on which
Medicare spent the most during the preceding year.
But high expenditures can result from high prices or
high usage. In other words, a high-use drug would
likely be subject to negotiation, regardless of whether
its price was unreasonably high. This could depress
drug supply and harm patients.
In fact, recent growth in total retail pharmaceutical
spending was driven by volume, not prices, which
decreased by 1.0 percent in 2018 and 0.4 percent in
2019. Even in 2020, the first year of the pandemic, total
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Reconciliation
retail prescription drug prices continued to fall by 0.1
percent.
viii
Harm to Patients by Decreasing the Number of
Life-Saving New Drugs
Innovative, new drugs effectively decrease the price of
health by reducing the need for other medical services
and by extending and improving the quality of life. For
example, new HIV drugs transformed a uniformly fatal
disease that could not be effectively treated at any
price into a chronic condition. New Hepatitis C drugs
cured a life-threatening and debilitating disease that
was previously poorly treated using expensive drugs
with severe side effects.
Drug development is a risky and expensive business.
The process normally takes ten years or more. Only
about one-in-ten products make it to market. Once
failures and the cost of capital are calculated, the costs
per success are in the billions. Pharmaceutical
companies invest in research and development in
anticipation of future profits. They will decrease
investment if future profits are limited by government.
A systematic review of published academic studies
between 1995 and 2020 showed a significant negative
relationship between drug price controls and both
investment in pharmaceutical research and
development (R&D) and access to innovative
drugs.
ix
For every 10 percent decrease in prices, there
was a 5 to 6 percent decrease in R&D investment
leading to decreased future drug discovery. And
countries with drug price controls suffer drug launch
delays and decreased access to new drugs compared
to the U.S.
x
The Council of Economic Advisers estimated that the
first version of the Democrats’ proposal—H.R. 3, the
Lower Drug Costs Now Act of 2019would lead to as
many as 100 fewer new drugs available to Americans
over the next decade.
xi
That is about a third of the total
number of drugs currently expected to enter the
market. This decreased access to drugs would reduce
Americans’ average life expectancy by an estimated
four months.
University of Chicago economist Tomas Philipson
estimated that the second version of the Democrats’
proposalthe Build Back Better billcould lead to a
29 to 60 percent reduction in R&D and 167 to 342 fewer
new drug approvals over the next 20 years.
xii
The price controls in the current reconciliation proposal
would be just as destructive. By limiting new R&D
investment, the bill would decrease the number of
innovative new drugs that improve health, extend life,
and eventually become the low-priced generics used
by most Americans.
Limiting price increases to the level of inflation would
also damage innovation and harm patients. Economists
estimated that if controls had limited the growth rate
of U.S. drug prices to the rate of inflation, R&D
spending would have been 30 percent lower, resulting
in 330-365 fewer new drugs38 percent of all new
drugs marketed worldwidecoming to market
between 1980 and 2001.
xiii
More Subsidies for Insurers
The second main component of the proposed
reconciliation package would continue the misguided
policy of obscuring the unaffordability of ACA plans
with increased taxpayer subsidies to health insurers.
The ACA’s insurance mandates caused premiums and
deductibles for individual market coverage to soar. In
2020, the average family plan carried a combined
premium and deductible of $25,000,
xiv
and the average
plan provides access to far fewer providers than group
plans.
xv
Most enrollees receive large subsidies
referred to as premium tax credits (PTCs)that
substantially reduce their share of the premium. The
ACA’s PTCs limit the percentage of income that
households pay for a benchmark plan (the second-
lowest cost plan available in the exchange). The PTCs
phase out as household income increases and were
capped at 400 percent of the federal poverty level
(FPL).
Rather than reform the underlying program, which has
resulted in such unattractive plans, congressional
Democrats have focused on increasing subsidies. In the
Paragoninstitute.org Reforming government. Empowering patients. 703.527.2734
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Reconciliation
American Rescue Plan (ARP) Act, Congress made the
subsidies for 2021 and 2022 more generous by
reducing the maximum percentage of income that
households must pay for a benchmark plan and by
expanding eligibility to people with incomes above 400
percent of the FPL. This caused a surge of Obamacare
spending. CBO estimates that the expanded subsidies
will cost about $30 billion in 2022.
xvi
The expanded
subsidies are poor public policy.
Unfair Benefit for Wealthy Households
The largest benefit of the expanded subsidies accrues
to households with income above 400 percent of the
FPL. The benefit is also larger for older households and
households in higher premium areas since the subsidy
structure limits premiums to a certain amount based on
household income, regardless of the age of the
household members or the actual premium.
On average, in 2021, a family-of-four headed by a 60-
year-old qualified for a $21,327 subsidy if they earned
401 percent of the FPL. If that household earned eight
times the FPLor $212,000the subsidy exceeded
$12,000. In some parts of the country, households with
incomes of more than $500,000 qualified for subsidies
in 2021 and 2022. For example, in 2021, a 64-year-old
couple with no dependents in Kay County, Oklahoma
and an income of $500,000 per year, faced a
benchmark premium of $49,897 and qualified for a
subsidy of $7,397.
Figure 1
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Reconciliation
Crowd Out of Private Financing and Increased
Inflation
CBO originally estimated that nearly 75 percent of the
spending on the expanded subsidies was for individuals
who already had health insuranceeither existing
exchange enrollees or new exchange enrollees who
previously had another source of coverage.
xvii
In other
words, most of the new government spending simply
replaced household spending, permitting these
households to spend more in other ways. This
contributes to inflation by increasing aggregate
demand without an increase in aggregate supply.
Higher Health Care Prices and Higher Premiums
The ACA’s subsidy design gives insurers pricing power
since almost the entire premium increase is paid by the
government. The ARP’s expanded subsidies worsened
the problem by making the subsidies even more
expensive and bringing more households into the
perverse structure. According to CBO’s May 25, 2022,
report, premiums for exchange plans are rising faster
than they anticipated, as are the subsidies.
xviii
Loss of Employer Coverage
The ACA subsidies are not available to households with
an offer of affordable employer coverage. As the size
of the subsidies increase, so does the incentive for
employers to not offer coverage. Small employers
those with fewer than 50 full-time employeeswill be
particularly incentivized to not offer coverage since
they are exempt from the employer mandate tax
penalties.
Benefiting Insurers, Not Consumers
The ACA subsidies are sent directly from the U.S.
Treasury to health insurance companies. A recent
economics study found consumers value the subsidies
at less than half of their cost.
xix
This study found that
the big winners from the flawed subsidy design are
health insurers, confirming earlier studies that show
that health insurer profits soared after the ACA took
effect.
xx
Perpetual, Costly Problem
The ARP’s two-year expansion of the ACA subsidies
was designed as a temporary, pandemic relief measure.
In Washington, short-term extensions of government
spending programs, which generally foreshadow
additional temporary or permanent extensions, are a
budget gimmick to keep the perceived cost of the
legislation down. A permanent extension of the
expanded subsidies would be very expensive, partly
because of much greater decline of employer-provided
coverage which has a much lower budgetary cost than
the ACA PTCs. According to CBO’s estimates, a ten-
year elevated subsidy extension would increase
deficits by $248 billion$306 billion in PTC costs
offset by $67 billion in higher federal tax revenue.
xxi
Conclusion
The reconciliation proposal being considered in
Congress would do far more harm than good. The
proposal would increase government power over
Americans’ health care. It would add inflationary
pressures by raising health insurance premiums and
costs during an inflation crisis. Worse, the proposal
would subsidize the insurance industry and wealthier
Americans at the cost of life-saving cures. The bill’s
In Focus
West Virginia
If the enhanced PTCs expire after 2022, the largest
per person subsidy loss is for people with income
above 400 percent of the FPL. Not many exchange
enrollees in West Virginia have income above 400
percent of the FPL. According to estimates from
University of Minnesota economist Steve Parente,
fewer than 1,200 West Virginians with income above
400 percent of the FPL are currently enrolled in the
exchanges.
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Reconciliation
drug pricing control mechanisms are unnecessary and
would diminish Americans’ health by decreasing the
number of innovative, life-enhancing drugs in the
future. If they precipitate an increase in new drugs’
launch prices, they will exacerbate rather than
alleviate high drug prices.
Much of the projected budgetary savings from the bill
are illusory, paper savings that result from the repeal
of a Trump-era rebate rule that is unlikely to ever go
into effect. And the two-year elevated ACA subsidy
extension is another gimmick.
Rather than legislation with poor policy and budget
gimmicks, policymakers should instead look to policies
that empower patients, reform underlying problems in
i
Cox, Jeff. “Inflation rose 9.1% in June, even more than expected, as consumer
pressures intensify.” CNBC, 2022.
https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-
even-more-than-expected-as-price-pressures-intensify.html.
ii
Rugaber, Christopher. “Yellen downplays US recession risk as economic
reports loom.” Associated Press News, 2022.
https://apnews.com/article/inflation-economy-prices-janet-yellen-
948009cdbc67f5b6f9742a35f7214feb.
iii
United States Senate Committee on Finance. Prescription Drug Pricing
Reform, 2022.
https://www.finance.senate.gov/imo/media/doc/070622%20Prescription%20
Drug%20Pricing%20Reform%20Leg%20Text.pdf.
iv
“Table 2. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city
average, by detailed expenditure category." Bureau of Labor Statistics, 2022.
https://www.bls.gov/news.release/cpi.t02.htm.
v
“Drug Expenditure Dynamics 1995-2020.” IQVIA Institute, 2021.
https://www.iqvia.com/-/media/iqvia/pdfs/institute-reports/drug-expenditure-
dynamics/drug-expenditure-dynamics-19952020.pdf?&_=1658924366010.
vi
“Prescription Drug Prices in the United States Are 2.56 Times Those in Other
Countries.” RAND Corporation, 2021.
https://www.rand.org/news/press/2021/01/28.html.
vii
Martin, Kristi. “Inflation Rebate Penalty for Drug Companies.” The
Commonwealth Fund, 2021.
https://www.commonwealthfund.org/publications/explainer/2021/jun/inflation
-rebate-penalty-drug-companies.
viii
“National Health Spending in 2020 Increases due to Impact of COVID-19
Pandemic.” Centers for Medicare & Medicaid Services, 2021.
https://www.cms.gov/newsroom/press-releases/national-health-spending-
2020-increases-due-impact-covid-19-pandemic.
ix
Labrie, Yanick. “Is there any evidence that regulating pharmaceutical prices
negatively affects R&D or access to new medicines? A systematic literature
review.” Canadian Health Policy, 2020.
https://www.researchgate.net/publication/342783080_Is_there_any_evidenc
e_that_regulating_pharmaceutical_prices_negatively_affects_RD_or_access
_to_new_medicines_A_systematic_literature_review.
x
Danzon, Patricia M., Y. Richard Yang and Liang Wang. “The impact of price
regulation on the launch delay of new drugsevidence from twenty-five
major markets in the 1990s.” Health Economics, 2005.
https://onlinelibrary.wiley.com/doi/10.1002/hec.931.
xi
“House Drug Pricing Bill Could Keep 100 Lifesaving Drugs from American
Patients.” Council of Economic Advisors, 2019.
government programs, and ensure Americans are not
left more vulnerable to inflation eating away at their
incomes and savings.
About the Authors
Brian Blase is the President of the Paragon Health
Institute and the Director of Paragon’s Private Health
Reform Initiative.
Dr. Joel Zinberg is the Director of the Paragon’s Public
Health and American Well Being Initiative and a senior
fellow at the Competitive Enterprise Institute.
Drew Keyes is Paragon’s Senior Policy Analyst.
https://trumpwhitehouse.archives.gov/articles/house-drug-pricing-bill-keep-
100-lifesaving-drugs-american-patients/.
xii
Philipson, Tomas J. and Troy Durie. “Issue Brief: The Evidence Base on the
Impact of Price Controls on Medical Innovation." The University of Chicago,
2021. https://cpb-us-
w2.wpmucdn.com/voices.uchicago.edu/dist/d/3128/files/2021/08/Issue-Brief-
Price-Controls-and-Drug-Innovation-Philipson.pdf.
xiii
Giaccotto, Carmelo, Rexford E. Santerre and John A. Vernon. “Drug Prices
and Research and Development Investment Behavior in the Pharmaceutical
Industry.” The Journal of Law & Economics, 2005.
https://www.jstor.org/stable/10.1086/426882.
xiv
Helm, Lisa. “$25,000: Cost of premiums and deductibles for a family ACA
plan in 2020.” BenefitsPRO, 2020.
https://www.benefitspro.com/2020/06/22/25000-cost-of-premiums-and-
deductibles-for-a-family-aca-plan-in-2020/?slreturn=20220623112438.
xv
Haislmaier, Edmund and Abigail Slagle. “Premiums, Choices, Deductibles,
Care Access, and Government Dependence Under the Affordable Care Act:
2021 State-by-State Review.” The Heritage Foundation, 2021.
https://www.heritage.org/health-care-reform/report/premiums-choices-
deductibles-care-access-and-government-dependence-under.
xvi
A May 2022 CBO report projects PTC and related spending at $89 billion in
2022 and $60 billion in 2023. The decline is almost entirely because the
expanded subsidies expire after 2022.
“The Budget and Economic Outlook: 2022 to 2032.” Congressional Budget
Office, 2022. https://www.cbo.gov/system/files/2022-05/57950-Outlook.pdf
xvii
“Reconciliation Recommendations of the House Committee on Ways and
Means.” Congressional Budget Office, 2022.
https://www.cbo.gov/system/files/2021-02/hwaysandmeansreconciliation.pdf.
xviii
“The Budget and Economic Outlook: 2022 to 2032.” Congressional Budget
Office, 2022. https://www.cbo.gov/system/files/2022-05/57950-Outlook.pdf.
xix
Polyakova, Maria and Stephen P. Ryan. “Subsidy Targeting With Market
Power.” National Bureau of Economic Research, 2021.
https://www.nber.org/system/files/working_papers/w26367/w26367.pdf.
xx
“The Profitability of Health Insurance Companies.” The Council of Economic
Advisors, 2018. https://trumpwhitehouse.archives.gov/wp-
content/uploads/2018/03/The-Profitability-of-Health-Insurance-
Companies.pdf.
xxi
Swagel, Phillip L. “Health Insurance Policies.” July 21, 2022. Congressional
Budget Office. https://www.cbo.gov/system/files?file=2022-07/58313-
Crapo_letter.pdf.