IPI Model Will Cause Shortage of Life-Saving Drugs
By Derek Hosford, American Consumer Institute
In 2018, the Department of Health and Human Services announced an International Price Index (IPI) would be instituted as part of an effort to bring down Medicare Part B prescription drug costs. The plan would set a limit on the price the government would pay manufacturers for drugs in-line with prices paid in other Organization for Economic Co-Operation and Development (OECD) countries.
By 2020, the Trump administration finalized its IPI plan by using its Most Favored Nation’s approach, which values the price of certain drugs equal to the lowest price available in any OECD member country.
Late last year, the U.S. District Court in northern California blocked the MFN rule from being implemented by the Center for Medicare and Medicaid Services (CMS) without compliance first with the Administrative Procedure Act (APA), which grants the public the right to comment on the new MFN rule. The courts have issued a temporary restraining order on the rule.
But the appeal of price fixing as a solution to lowering overall costs is concerning and destructive to the innovation of life-saving drugs, and it is time for the Biden Administration to overturn Trump’s plan.
An IPI model should not be considered as a valid option to bring down prescription costs, because the mechanics of setting an incredibly low-price ceiling would result in much less availability of drugs to patients and a drain on investment into research and development for new treatments.
While it is not fair for foreign governments to free ride on American innovation and pay less for drugs invented in the United States, setting arbitrary prices at home to force other countries to pay more is not a winning strategy to achieve bringing down costs for patients.
Americans want low priced drugs, but they also want to continue to have access to the best life-saving medicines available. Implementing price controls would put American innovation in the medical industry at risk.
Researchers at Precision Health Economics ran a study in 2018 that showed that removing price controls in non-U.S. OECD countries would produce a 12% increase in investment into research and development and result in the creation of around 13 new drugs per year.
Furthermore, The Biotechnology Innovation Organization discovered that prior to the implementation of price controls, European-based firms invested 24% more than the United States in R&D. By 2015, however, these countries lagged the United States by over 40% in this category.
Countries that set price controls also consistently end up with shortages of medications. In 2019, The Guardian reported the United Kingdom suffered 17 drug shortages including treatments for cancer and Parkinson’s. Likewise in 2020, a pharmacy in Canada experienced a shortage so severe that it had to put a pause on its flu shot program entirely.
Implementing price controls at home would show similar negative impacts and be catastrophic for Americans on Medicare. The former President Trump’s own economists attested to this fact in 2019, when The Lower Drug Costs Now Act was proposed in Congress. The Council of Economic Advisors stated the proposal would do more harm than good by forcing manufacturers to accept the prices set by the Secretary of Health and Human Services. They concluded that price controls would reduce pharmaceutical revenues by $1 trillion and keep 100 drugs out of the hands of American patients.
Just like Congress was wrong to suggest price controls as a solution back then, former President Trump was wrong to suggest them. Instead of setting price controls, the government should consider alternative solutions such as expediting the process for the approval of generic drugs to encourage competition or closing rebate loopholes Pharmacy Benefit Managers use to extract rebates that balloon the price of medications.
Access to life-saving treatments makes a tremendous difference in the lives of Medicare patients. We cannot expect to copy the price models of other nations without inheriting the grueling flaws that come with these price controls. Hopefully, for the sake of consumers, President Biden’s administration will reverse Trump on this.
Derek Hosford is a policy analyst at the American Consumer Institute, a nonprofit educational and research organization. For more information about the institute visit www.TheAmericanConsumer.org or follow us on Twitter @ConsumerPal.