Caps on drug prices seem like a nice idea… if you don’t think about it very much.

Should Colorado Impose Caps on Drug Prices

After all, who could be against more affordable drugs, right?

And that’s the reasoning behind the recent decision of the Colorado Drug Affordability Board to move to cap the price of Enbrel, an Amgen-manufactured drug used to treat rheumatoid arthritis.

Several other states have set up similar boards. But if Colorado goes through with it, it would be the first state to impose a drug price cap at the state level.

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The Problem With Price Caps

Government-imposed price controls have a long and consistent history of inefficiency, failure, and even tragedy. And the danger is especially acute when it comes to trying to regulate the price of prescription drugs.

The danger, of course, is that when the government steps in to substitute the judgment of unaccountable bureaucrats for the invisible hand of market forces, it nearly always guesses wrong.

If they set prices too high, drugs are unaffordable, and the government has defeated its own purposes in trying to set prices.

If they set prices too low – the much greater danger, because that is where the political incentives lie – then these drugs won’t be affordable to produce at all.

When that happens, the drug won’t be available… at any price.

Doctors can prescribe it all day long. But if no one is manufacturing it, and pharmacies can’t stock it, patients can’t get the treatment they need.

This isn’t just schoolhouse econ theory: this dynamic is playing out right now, thanks to some ill-advised provisions in the Inflation Reduction Act (IRA).

This Act, signed into law by President Biden, would force drugmakers to pay rebates if they increased prices faster than inflation. The law also includes a provision for the Center for Medicare Services to renegotiate and cap prices on at least 60 different medications starting in 2026, with ten medications slated for caps in the first year.

Drugs with generic or biosimilar substitutes are exempt from price limits.

Before the federal government even announced which medications would be first on the docket, multiple drug manufacturers simply pulled out of the market, even halting research programs that were at work developing new and better treatments for the future.

Case in point, prominent drug manufacturer Novartis canceled multiple cancer research programs, blaming the Inflation Reduction Act specifically.

The new law may destroy the prospects for as many as 135 new cures for various crippling and deadly diseases, according to University of Chicago economist Tom Phllipson.

“The new deal would use the “savings” from imposing price controls on drugs to extend the already-enhanced Affordable Care Act (ACA) subsidies, which took effect last year,” says Phillipson. “This would lead to a massive loss of life, due to foregone medical innovation, and a reduction in the quality of care, due to the government gaining more control over people’s insurance coverage.”

The resulting disruption to drug availability is both costly and deadly: It could result in a reduction of life expectancy and the loss of as much as 330 million life years.

Novartis CEO Vas Narasimhan has publicly attacked the Inflation Reduction Act, saying the new law will have  “unintended long-term innovation distortion, which disadvantages small molecule and related medicines for the Medicare population, indication expansions in cancer, medicines that take longer to ramp in cardiovascular disease or in respiratory disease.”

Eli Lilly and Company also cited the IRA as the reason it halted research into a promising new drug that was in the early stages of development for treating various blood cancers.

“The IRA changes many dynamics for small molecules in oncology and when we integrated those changes with this program and its competitive landscape, the program’s future investment no longer met our threshold,” said the company in a statement.

The Impact of IRA Price Controls on Rare Disease Treatment

The IRA’s unintended effect is possibly the most devastating for those with rare diseases. According to the Council for Affordable Health Care, some 7,000 different rare diseases afflict more than 30 million Americans.

These Americans – and millions overseas who benefit from America’s massive research and development capabilities when they are properly unleashed – rely on continual research into orphan drugs.

What are Orphan Drugs?

Orphan drugs are medications that are developed specifically to treat rare diseases that affect a small number of people.

Because of the small number of people who need them, orphan drugs are often very expensive to develop and bring to market.

It can cost hundreds of millions of dollars to develop a new drug, and the costs of clinical trials are often higher for orphan drugs because they are done on smaller patient populations.

In addition, orphan drugs may not have the same profit potential as drugs that treat more common diseases, which can make it difficult for drug companies to recoup their investment.

As a result, drug companies may lose interest in developing them if they do not receive sufficient financial support.

Pharma companies operating in this space are extremely sensitive to legislative and regulatory risk.

With the new law, and a hostile regulatory environment, drug companies are rolling back their investment in limited production drugs.

Increasingly, if a drug doesn’t treat an extremely common condition and therefore has “blockbuster” potential, drug companies are strangling their R&D programs in the crib.

Here’s an example of how the Inflation Reduction Acts’ new hostile regulatory and legislative climate affects orphan drug development:

In October 2022, Alnylam Pharmaceuticals Inc. stopped developing a potential treatment for the rare eye disease Stargardt because of new price controls from the IRA.

The drug, Amvuttra, was already approved to treat a rare disease called transthyretin-mediated amyloidosis. Alnylam was researching Amvuttra for Stargardt, but finding a second use for the drug would disqualify it from orphan status, and make it subject to price negotiations.

That substantially increased the long-term risk-reward profile for the drug, and Alnylam no longer considered the investment worth the risk.

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Back to Colorado

When drugs are in short supply, it makes even less sense for states to cap drug prices than the federal government.

That’s because a state-level cap would simply make the drug unavailable in any states that impose them. The available supply would simply be routed to states where the seller can get a fair price.

As with all public policy questions, one must always remain mindful of the Law of Unintended Consequences. After all, it’s often the well-meaning politicians and bureaucrats who are the most dangerous.

The correct course of action, in the long run, is for government to focus on drug safety issues, and stay out of trying to regulate prices.

For Further Reading: Colorado Introduces New “Public Option” For Health Insurance. We’re Skeptical | How To Use The Government Price Transparency Rule to Compare Colorado Hospitals | Medicare in Colorado