Congress is about to pass the Inflation Reduction Act containing a purported Democratic party breakthrough to address our nation’s exorbitant prescription drug costs: Medicare will have the right to negotiate drug prices with drug manufacturers. 

Or to describe the proposed statute more accurately: Medicare will have the right to impose price controls. The statute allows Medicare to identify price “ceilings” on 10 high-cost drugs in 2026, and as many as 55 high-cost drugs by 2029. 

The statute dictates serious consequences for any manufacturer that refuses to accept the government’s price controls: The government can slap a manufacturer with an excise tax as high as 95% on sales.  

Based on Democrats’ control of the House, most analysts predict the statute will pass, and President Biden will sign it into law. 

What then? 

The statute mandates that the Health and Human Services secretary publicly identify the first ten drugs by September 1, 2023, and announce the government’s “negotiated” prices for those drugs by August 1, 2024.

How convenient politically — only three months before the next Presidential election. Given looming price controls, manufacturers of identified drugs will likely increase their list prices in the commercial marketplace.

Moreover, they’ll likely do so as soon as they realize they’re going to be hit with price controls, meaning shortly after September 1, 2023, and long before the first price controls go into effect in 2026. 

Moreover, manufacturers may try to recoup the revenues they’ll lose from Medicare by increasing many of their drugs’ list prices, not just the prices of the “negotiated drugs.” 

Thus, we can soon expect higher prices on numerous drugs for the 220 million Americans who purchase drugs in the commercial marketplace, as well as for their employers who pay for most of the cost of prescription drug coverage for their employees and their dependents.  

Can anything be done? 

If a few large employers — with leverage in the marketplace given the hundreds of millions of dollars they spend annually to provide coverage to their employees — take action to create drug price competition (not drug price controls), those employers can quickly decrease the prices of hundreds of drugs (not 10). Governors with White House aspirations may lead the way. 

Governor DeSantis is in a perfect position to do so, since he recently issued an Executive Order requiring all Florida executive agencies in all future contracts to change their prescription coverage contract structures. Governor Abbott has also demonstrated an interest in controlling drug prices. 

What steps can these Governors – and other large employers – take? 

Every large employer can create “Bid Days” in every therapeutic category where there are interchangeable drugs. On a specified date and time, twice a year, they can require every manufacturer wishing to sell its drugs to simultaneously submit its prices for its drugs. Then they can publicize all prices, by therapeutic category, for all to see.  

What will happen? 

On the first Bid Day, those manufacturers seeking greater market share in a therapeutic category will realize they need to reduce their high prices to gain market share.  

On the next Bid Day six months later, those manufacturers that previously lost market share will know they must underbid the lowest, previously bid prices. Those manufacturers that gained market share on the previous Bid Day given their low prices will know they must reduce their prices still further, or they will be underbid by others. 

As serial Bid Days take place, drug prices will plummet.  

Notably, there are numerous therapeutic categories where price competition is feasible. For example, there are multiple, interchangeable insulin products, hepatitis C treatments, antidepressants, ADHD drugs, cholesterol-reducing drugs and blood pressure treatments. There are even interchangeable drugs for certain types of cancer.  

In short, the price control provisions of the Inflation Reduction Act will likely cause manufacturers to inflate the prices of numerous drugs for the entire commercial marketplace.

There might, though, be a silver lining in what the federal government has created — the opportunity beckoning large employers, and governors like Messrs. DeSantis and Abbott, to finally change the prescription drug marketplace. Their best way to do so will be to spur price competition, not price controls.