For every complex problem there is an answer that is clear, simple, and wrong.
H.L. Mencken
Back in 2022, the Biden Administration reasoned that drug costs are too high and devised a clear and simple answer: incorporate a Maximum Fair Price (MFP) provision into the Inflation Reduction Act of 2022 (IRA). Their clear and simple answer is also wrong.
Carrying out this wrongheaded thinking, CMS set MFPs on ten Medicare Part D drugs identified in 2023 that will become effective January 1, 2026. On January 17th CMS announced that the agency’s price setting efforts are now targeting the next 15 drugs, allowed by law, which will become effective January 1, 2027.
The Trump Administration should reconsider this policy.
CMS calls the MFP process a negotiation with innovative drug manufacturers but calling a process a negotiation doesn’t make it so. The government has the authority to impose draconian penalties on companies that do not comply with the process, including an excise tax up to 95% of the drug’s entire U.S. sales.
The prospect of such an excessive financial penalty dramatically skews the negotiation in the government’s favor making a fair process simply impossible. As a result, the government is, for all practical purposes, imposing price controls on these selected drugs. Regardless of intentions, price controls always impose net costs on society. In this case, they will limit drug innovation.
Prior to the IRA, research predicted that the drug price controls will significantly reduce total R&D spending. With slashed budgets, the pace of innovation will slow dramatically, resulting in fewer breakthrough medications reaching the market. This, in turn, will harm patients who are depending on the development of these new drugs for their health and well-being.
A study by Vital Transformation estimated that, had the IRA been in place beginning in 2014, “between 24 and 49 therapies currently available today would most likely not have come to market and therefore not be available for patients and their providers.” A study by University of Chicago economists found an even larger impact. Based on their analysis, the IRA price controls “will reduce revenues by 12.0% through 2039 and therefore that the evidence base predicts that R&D spending will fall about 18.5%, amounting to $663 billion. We find that this cut in R&D activity leads to 135 fewer new drugs.”
True to these predictions, the number of drug trials is now falling. Charles River, a top clinical trial firm, warned in 2024 that its research operations have been significantly reduced because biopharmaceutical companies are reassessing their research portfolios.
Rather than continue down this destructive path, the incoming Trump Administration should pause the price negotiation process for this latest tranche of 15 Medicare Part D drugs. Ideally, this pause will be followed by Congressional action that repeals CMS’ negotiation authority permanently.
Rather than implementing destructive price controls, lawmakers should implement patient-centric reforms that enhance market efficiency, promote innovation, and address the root causes of rising out-of-pocket costs for patients – the complex and opaque drug pricing system that remains largely controlled by Pharmacy Benefit Managers (PBMs).
PBMs play a significant role in determining patients’ out of pocket costs for prescription medications. They negotiate rebates and discounts with drug manufacturers, but this process is opaque, and the current system incentivizes PBMs to favor drugs with higher list prices that leave room for PBMs to negotiate large rebates. Due to current insurance designs, this process drives up out-of-pocket costs for consumers as evidenced by the growing affordability concerns even though the net real prices of drugs (prices received by the manufacturers, which include the rebates) have been declining for seven straight years.
Reforming the PBM market addresses this fundamental driver of the drug affordability problem. Effective reforms mandate transparency in the negotiation process and ensure that all negotiated savings are directly passed on to patients. By eliminating these market inefficiencies, PBM reform can create large out-of-pocket savings for patients while still incentivizing continued drug innovation.
By pausing the price negotiation process and advocating Congressional action to repeal CMS’ expanded authority, the incoming administration can foster an environment that encourages innovation and ensures that patients have access to affordable medications. Only through comprehensive reforms that promote transparency and ensure patients benefit from negotiated drug savings can the true drivers of high drug prices be effectively addressed. Price controls are not the answer because they impede innovation to the detriment of patients.
Dr. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute and the director of PRI’s Center for Medical Economics and Innovation.
