‘Inflation Reduction Act’ main effect is to cut health, not inflation

Senate Democrats unveiled a comprehensive budget reconciliation package last week, which they have misleadingly dubbed the Inflation Reduction Act of 2022. Although many economists are thinking about the effects of inflation, its most harmful component remains its impact on health. Health care provision will very conservatively drive US long-term losses to value more than $66 trillion over the next 17 years, dwarfing all other economic impacts, including inflationary effects, even if beneficial, as well as deficit reduction. Are.

shows economic evidence That increases in life expectancy are as important as GDP growth in lifting America’s well-being. In other words, some people give up a year of their life to achieve an inflation-free year with moderately high growth. Emphasizing the low economic impact of the so-called Inflation Reduction Act is tantamount to the joy that a hurricane spared the home, even if its owners died.

The new deal will use “savings” from imposing price controls on drugs to expand an already enhanced Affordable Care Act (ACA) subsidy, which took effect last year. This would result in a major loss of life due to the government gaining more control over people’s insurance coverage, foregoing medical innovation and a reduction in the quality of care.

taxpayers currently spend about $17,000 per newly insured person on these ACA subsidies. They are public resources that can cover more people if spent wisely, rather than being a true corporate welfare program for insurers. In fact, about 75% of the increased subsidy went to the already insured. Many Americans enrolled in Obamacare plans are middle and even high-income earners and already had insurance through their employers, which they omitted to enroll in artificially cheap exchange plans. This is why the extra cash was only expected to increase the number of insured 1.3 million people this year,

In general, Washington’s obsessive focus on Obamacare is misguided in enhancing the health of the population, as its exchanges cover only 4% of our population. While it is true that Obamacare uses private insurers, those insurers are bombarded with red tape, so coverage is not of as high quality as that offered on private plans able to compete freely for members. Is. The fact that so many eligible people do not switch to affordable subsidized plans reflects their low quality of care.

Price controls on prescription drugs, meanwhile, will also reduce the quality of care by reducing the number of better new treatments coming to market. If the manufacturers refuse to accept the government’s fixed prices, they will face punitive financial penalties.

Indeed, the bill is more harmful than standard price controls, as such controls usually allow companies to price up a limit. But there’s no limit here – companies negotiate with a government that, if it doesn’t accept its low price, can incur large financial penalties. This is similar to selling your home for you and if you do not agree to a buyer’s short offer, the buyer keeps part or all of the house.

Senate Majority Leader Chuck Schumer (D-NY) speaks to reporters during a news conference at the US Capitol in Washington, DC July 28, 2022
Drew Anger / Getty Images

The law also penalizes drug manufacturers if they raise their prices at a rate higher than inflation. But this is likely to push up the prices further. If producers are unable to increase prices in the future – even in the event of unforeseen circumstances – they will come to the market with increased prices to hedge their bets.

Ironically, some claim that these Nixonian price controls are necessary to combat inflation – yet drug prices have increased Just 2.5% over the previous year, well below the general inflation rate of 9.1%.

Drug prices are rising so slowly thanks to the Trump administration’s successful efforts to reduce FDA red tape, which led to a record number of approvals for generic drugs. Generics account for more than 90% of all prescriptions, and drug prices fell for the first time in 50 years in 2018 partly because of the resulting increase in competition. This suggests that market forces are more important than government controls to cut drug inflation.

In addition, any savings in dollars by the Inflation Reduction Act would be affected by loss in life. Over the next 17 years, the bill would reduce pharmaceutical industry research and development by about $663 billion, resulting in 135 fewer new drugs. it will harm 330 million life-years, nearly 30 times the loss from COVID-19 so far. The associated loss in value exceeds $66 trillion, with longevity being half the value traditionally used by agencies such as the FDA and EPA. No economic gain is worth more than living long enough to see those benefits.

Damage can include treatments for Alzheimer’s, cancer, and more. In fact, about 50% of today’s FDA pipeline is for new cancer drugs—and the bill would cut more and more of the amount spent on cancer research. nine times more as Biden “Cancer Moonshot” Initiative enhances it.

Lawmakers can better reduce health care costs through supply-side interventions that increase competition and lower prices.

Medicines make up only a few percentage points in the overall increase in health care costs in recent years. Labor costs are more significant: Wages for doctors, nurses, administrators and the like account for more than 70% of total health care expenses. One of the most effective ways to reduce health care spending is thus expanding the labor supply. Yet the American Medical Association and other special-interest groups lobby to restrict the number of health care workers through tougher education and credentialing requirements. For example, only one in 10 medical school applicants gets admission, and doctors trained abroad are barred.

Supply-side measures will cut health care costs by increasing choice and competition. many were placed in one 2019 Interagency Report from the Departments of Health and Human Services, Treasury and Labor. Reforms will improve the quality of care and reduce the real cost of better health enabled by new treatments. The Inflation Reduction Act, by contrast, would do the opposite.

Thomas J. Philipson is an economist at the University of Chicago and served as a member of the White House Economic Advisory Council and acting chairman from 2017 to 2020.

The views expressed in this article are those of the author.

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