This year, under the terms of the Inflation Reduction Act of 2022 (IRA), the Centers for Medicare and Medicaid Services (CMS) will begin “negotiations” with drug manufacturers to set the price for select drugs to be provided within the Medicare program. That’s bad news, especially for America’s seniors.

While President Biden and his congressional allies promise that the law will reduce seniors’ drug costs and “stabilize” their Medicare premiums, the reality is that these new changes could create serious obstacles for seniors attempting to access future life-saving medications. Why? Because the law sets in motion economic dynamics that will discourage investment in breakthrough medications for a large and growing Medicare population in a market environment already plagued by persistent prescription drug shortages and jeopardized by precarious drug supply chains.

Let me be more specific. In the coming years, the Medicare bureaucracy will set the price of Medicare drugs through a progressive process of “negotiation” for an ever-larger number of prescription drugs. The CMS announced the first set of drugs to be subject to the process in September 2023, and by September 2024, the agency will finalize the fixed prices for these drugs to be effective in 2026.

In setting drug prices, CMS must initiate a comprehensive data collection project, ranging from drug manufacturers costs and marketing and sales information to data on the comparative effectiveness of therapeutic alternatives and “clinical benefit”. In its evaluation for determining the “right” price for the drug, CMS staffers are charged with considering any other information from drug manufacturers that they deem relevant.

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Beginning in 2026, then, Medicare beneficiaries will be able to secure the first set of prescription drugs on the CMS list at the Medicare bureaucracy’s “maximum fair price”. Year by year that list will expand. This price setting process is not subject to judicial review and any pharmaceutical research and development company that does not accept the Medicare bureaucracy’s administrative price is subject to a particularly harsh punitive tax. As Dr. Joel Zinberg, associate professor at Mount Sinai School of Medicine, observed, “The whole process is a sham. CMS has all the leverage and absolute discretion on setting the price.” To put it simply: This is coercion, not negotiation.

In the short-term, of course, Medicare beneficiaries will enjoy the benefit of the government’s lower drug prices, reflected in lower Medicare premiums. Likewise, Medicare insurance plans will benefit with lower claims costs and potentially higher profit margins. Invariably, based on over four thousand years of economic experience, government price control policy is wildly popular—at least at first—and politically attractive. However, that initial popularity never lasts. The reason: there are two unavoidable consequences of such a policy.

First, government price controls do not “control” cost, rather they shift costs from the controlled to the uncontrolled sector of the market. With these price fixing programs in place, drug research and development companies will simply make up for the lost Medicare revenue through price increases in the private and commercial markets, increasing drug costs and health insurance premiums for individuals and families enrolled in private and employer-sponsored health insurance plans. Which means that working class Americans can expect a serious cost increase.

Second, government price controls always reduce the availability of goods and services in the controlled sector of the economy. That means shortages are on the way. Indeed, the only real point of disagreement is over the severity of the coming shortages. The Congressional Budget Office estimates that these new pricing regulations mean that there will be 13 fewer new drugs brought to market in the next 30 years. Independent analysts are far less optimistic. For example, back in 2021 University of Chicago economist Thomas Philipson analyzed a price control strategy broadly like that embodied in current law and estimated that there would be 135 fewer drugs by 2039. More recently, Philipson estimated that the Inflation Reduction Act could lead to a 21.7 percent reduction in research and development for cancer drugs. Not surprisingly, Dr. Dana Goldman and a team of researchers at the University of Southern California, emphasized, “Absent reform, the IRA may result in a decline in new drug innovations well as a decline in research on new indications and evidence generation for long-term effectiveness and safety outcomes.” The loss of new therapies, especially for cancer, could be disastrous for public health.

Unfortunately, this process is already in motion. Courtesy of President Biden and his congressional allies, some biotech and drug companies have already announced cancellations of certain research and development projects. This is a classic example of the ever-expanding modern administrative state at work, crowding out superior market solutions with increasingly complex regulatory schemes. And it’s precisely the opposite of what is needed in today’s fraught market environment.

That’s right, Americans are already much too heavily dependent on foreign manufacturers, notably an increasingly hostile Communist China, for many of our most vital medications. As Rep. Brad Wenstrup (R-OH), a physician and chair of the House Select Subcommittee on the Coronavirus Pandemic, recently noted, “Many of the name brand and generic medications that millions of Americans rely on every day, from antibiotics to blood pressure medications, to cancer drugs and blood thinners, are being manufactured in China, or rely on materials that come from China.” Rather than imposing policies that will undercut future drug manufacturing at home, , as the Biden administration insists on doing, policy makers, as The Heritage Foundation has recommended, should start reversing this dependence on unstable or hostile foreign sources.

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Second, Americans have already been persistently plagued by drug shortages. In 2023, for example, there was a shortage of 309 drugs, including certain anti-biotics, cancer drugs and medications for diabetes; traceable to “spikes” in demand for certain therapies, manufacturing problems, and supply chain disruptions. While this is hardly a new problem, it could seriously worsen with the increasing demand for newer and better medications by a rapidly growing Medicare population, now a href="https://www.cms.gov/oact/tr/202.%20">projected to increase from over 65 million today to almost 84 million by 2040. To meet this surge in demand, Congress needs to ensure a more reliable supply of drugs by pursuing policies that encourage even more robust pharmaceutical research and development, especially for cancer and diabetes.

Finally, the emergence of antibiotic resistant bacteria remains a perennial and deadly threat to public health. In 2019, for example, the Centers for Disease Control and Prevention (CDC) reported the existence of 18 such pathogens, which infected at least 2.8 million Americans and killed 35,000 of them.  While preventing such infections is essential, therapeutic innovation is crucial to keeping ahead in the continuing “arms race” against evolving bacteria. America does not have the luxury of adopting any policy that might discourage such innovation.

In this context, a challenging international and economic environment, the Biden policy is nothing short of reckless. No matter how extensive or elaborate the data collection or regulatory formulas, there is nothing new or imaginative about government price fixing. It is an old-fashioned and out-of-date political strategy to reduce costs by controlling and reducing supply—regardless of economic demand.

We shouldn’t be surprised. Washington’s “progressive” central planners have been old-fashioned and out-of-date for decades. And if they get their way, Americans will be in for another painful lesson in government central planning.