The Democrats' days in control of federal healthcare policy are numbered. But they were able to do quite a bit of damage during President Biden's term.
The scheme of price controls they've put in place for drugs dispensed through Medicare is a case in point. Ten drugs in Medicare Part D will be subject to price controls starting in 2026. More will be ensnared in every subsequent year.
There's no shortage of research illustrating the disastrous impact that price controls have on consumer welfare and the broader economy. The latest is a new paper from Georgetown University's Yunan Ji and Indiana University's Parker Rogers that examined 20 years of data to evaluate the impact of Medicare price cuts in the durable medical equipment industry.
The results are staggering. As revenue for DME manufacturers declined, so too did innovation and quality. It's a sobering reminder of how price controls work, and how they could wreak havoc in the pharmaceutical market.
From the outset, Ji and Rogers dispense with one of the most pernicious ideas in all of health policy: that because the United States spends a lot of money on health care, it must necessarily be wasting money.
The authors note that while conventional wisdom holds "that a substantial portion" of health spending "is 'wasteful,'" in reality "efforts to reduce spending may inadvertently suppress incentives for innovation—the driving force behind most advances in life expectancy and quality of care."
They specifically examine how Medicare's attempts to reduce spending on DME—things like oxygen tanks and glucose monitors—have ground advancement in the space to a halt.
Rogers and Ji note that, while Medicare did not impose price controls on DME, it functionally capped prices by harnessing its market power to underpay producers. The authors identify three "stages" of these de facto price controls: two across-the-board price cuts in 2009 and 2016, and the implementation of an auction system between 2011 and 2016.
They found that these payment reforms led to a 61% decrease in payment for affected devices—around a $2.5 billion difference. These payment reductions in turn led to a 25% decrease in new device introductions and a 75% decrease in patents.
The study also considered "stock market valuations of patented innovations" and found that the price cuts led to economic "losses of $46 billion annually" which, as the authors note, is "substantial relative to the $3.8 billion Medicare savings."
This disjunction illuminates an important point about price controls. Whatever savings they may generate are dwarfed by the losses they bring about. In this case, we see not only that Medicare savings are considerably less than economic losses but also that price cuts led to a reduction of 53% in research and development funding. That's equivalent to $2.6 billion.
Lest these numbers distract from what these price cuts mean for patients, the authors lay it bare. Innovation in the DME space has made it possible for portable oxygen devices to replace "heavy, hazardous oxygen tanks," and for "continuous glucose monitors" to make obsolete "painful finger-stick tests."
It's hard to overstate how much these improvements have helped patients. But just because we've come this far does not mean we're reached the peak of DME technology. Without price caps, there's no telling how much farther this technology could advance.
"Policymakers must weigh the short-term benefits of cost savings against the long-term risks of stifling innovation, disrupting market structures, and compromising product quality," the authors write.
Of course, DME is not the only space where price caps are a live threat. As the authors observe, their "analysis provides valuable guidance for ongoing policy discussions, especially in light of proposed reforms such as those in the Inflation Reduction Act, which aim to reduce health care costs through price controls on pharmaceutical drugs." Price controls on the first ten drugs dispensed through Medicare Part D take effect in January 2026.
The Inflation Reduction Act's price controls could lead to the development of 135 fewer drugs by the end of 2039, according to research from University of Chicago Professor Emeritus Tomas Philipson.
As with DME, this effort to achieve short-term savings will hurt patients in the long run. Government intervention can cut costs in the moment. But it does so at the expense of future treatments and cures.
Sally Pipes is the Pacific Research Institute’s president, CEO and Thomas W. Smith Fellow in Health Care policy
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