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Yet more evidence that price controls are bad for patients
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Yet more evidence that price controls are bad for patients

The Democrats’ days in control of federal health care policy are numbered. But they were able to do quite a bit of damage during President Biden’s tenure.

The price control scheme they put in place for Medicare drugs is one example. Ten Medicare Part D drugs will be subject to price controls starting in 2026. More will be captured in each subsequent year.

There is no shortage of research that illustrates the disastrous impact that price controls have on consumer welfare and the economy at large. The most recent is a new paper Georgetown University’s Yunan Ji and Indiana University’s Parker Rogers, who examined 20 years of data to assess the impact of Medicare price cuts on the durable medical equipment industry.

The results are astounding. As revenue for DME manufacturers has declined, so has innovation and quality. It’s a reminder of how price controls work and how they could wreak havoc on the pharmaceutical market.

From the outset, Ji and Rogers reject one of the most damaging 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.

authors note that while conventional wisdom holds “that a substantial portion” of health spending “is “wasteful,” in reality “efforts to cut spending can 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 stalled the field’s progress in space.

Rogers and Ji note that while Medicare has not imposed controls on DME prices, it has functionally capped prices by leveraging its market power to underpay manufacturers. The authors identify three “stages” of these de facto price controls: two general price reductions 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 percent drop in payments for affected devices—about a $2.5 billion difference. These payment reductions, in turn, led to a 25% drop in new device introductions and a 75% drop in patents.

The study also considered “stock valuations of patented innovations” and found that price cuts resulted in “economic losses of $46 billion annually,” which the authors note is “substantial in compared to $3.8 billion in Medicare savings.”

This disjunction illuminates an important point about price controls. Whatever savings they may generate are dwarfed by the losses they produce. In this case, we see not only that the Medicare savings are considerably less than the economic losses, but also that the price reductions led to a 53% reduction in R&D funding. That equates to $2.6 billion.

So that these numbers don’t distract from what these price cuts mean for patients, the authors lay it out. Innovation in the DME space has made it possible for portable oxygen devices to replace “heavy and dangerous oxygen tanks” and “continuous glucose monitors” to do outdated “painful finger tests.”

It’s hard to overstate how much these improvements have helped patients. But just because we’ve come this far doesn’t mean we’ve reached the pinnacle of DME technology. Without price limits, there is no telling how much 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 real threat. As the authors note, “their analysis provides valuable guidance for ongoing policy discussions, particularly in light of proposed reforms, such as those in the Inflation Reduction Act, that seek to reduce health care costs by controlling pharmaceutical drug prices “. Price controls for the first ten Medicare Part D drugs go into effect in January 2026.

Price controls in the Inflation Reduction Act could lead to 135 fewer drugs being developed by the end of 2039, according to research from the University of Chicago, Professor Emeritus Tomas Philipson.

As with DME, this effort to achieve short-term savings will hurt patients in the long-term. Government intervention can reduce costs at this point. But it does so at the expense of future treatments and cures.