The SMART Prices Act is anything but smart

America’s largest pharmaceutical companies continue to sound the alarm about last year’s Inflation Reduction Act.

In late May, Novartis announced that it had already dropped some early-stage cancer drugs because of Medicare’s new power to dictate certain drug prices. The news followed public statements and official government filings from Amgen, Genentech, Merck, Biogen, and others, all warning that the IRA is already forcing them to scrap promising research lines.

But rather than heeding these warnings, the IRA’s strongest proponents are doubling down. In April, Sen. Amy Klobuchar (D-Minn.) introduced the Strengthening Medicare and Reducing Taxpayer (SMART) Prices Act, which now has dozens of Democratic co-sponsors. The legislation would give Medicare officials the power to set prices for more drugs and do so even sooner after they hit the market. It would also lower the ceiling for prices for the drugs subject to “negotiation.”

The SMART Prices Act is deeply stupid, in that it would make both the delivery of health care — and the cost of improved outcomes — more expensive.  

Time and again, economists have demonstrated that as a general matter, increased spending on new drug innovations reduces overall health care spending by replacing the need for more costly care. As just some examples, statins replace heart surgeries, Hepatitis C drugs replace kidney transplants, and antidepressants replace in-person psychology visits.

Thus, efforts that kill off drug innovation prevent such cost reductions from taking place.

Already, the IRA’s drug pricing provisions have undermined efforts to combat numerous debilitating conditions, from cancer to Alzheimer’s. The SMART Prices Act, if enacted, would sound a death knell for investment in one of the most innovative sectors of the U.S. economy.

The lawmakers who crafted the SMART Act seem incapable of understanding that in any industry, future earnings drive investments. A congressional field visit by these career politicians to a venture capital or private equity firm would maybe help them understand that this applies to medical research investments, as well.  

By capping the potential returns on drug development, price controls discourage companies from investing in research. An analysis colleagues and I conducted suggested that these price controls could prevent the creation of 135 new medicines by 2039 — and thus shorten American patients’ lives by a collective 331 million years, compared to a scenario in which those new drugs came to market as scheduled.

And based on recent company announcements, our estimate may have been too optimistic. Many major firms have already announced plans to scale back drug development. It appears that cancer treatments will be hit especially hard. Within just four months of the ink drying on the IRA, at least 28 companies announced plans to cut back on development, due to the act, on earnings calls.

Drugmakers’ reasoning isn’t difficult to understand. Drug development is an expensive undertaking, with the cost of each newly approved medication averaging more than $2 billion after taking failed research lines into account. Price controls impede pharmaceutical firms from earning outsized returns on their few successful projects — and as a result, they diminish the incentive to pursue breakthrough drugs in the first place.

Remarkably, Klobuchar and her colleagues seem unperturbed by this outcome. Their proposed new legislation takes some of the most destructive features of the IRA’s drug pricing policy and makes them far worse. This is the exact opposite of “smart” policy.

Consider that the original law exempted new medicines from price controls for either nine or 13 years following Food and Drug Administration approval, depending on the category of drug. This was intended to give drug firms at least some chance to earn back their investment before government price controls take effect.

The SMART Act would make all medicines eligible for price controls just five years after FDA approval. This not only forestalls any real possibility of earning back a drug’s research costs, but it also discourages pharmaceutical firms from carrying out additional research on approved drugs to make them useful for other diseases. Why undertake the expensive clinical trials necessary for approval for new indications when the return will be near zero?

The SMART Act also doubles the number of medicines eligible for government price controls — an indication of the intent of the authors to allow the government to set prices on all drugs.

Instead of acknowledging the distress signals from industry and seeking to correct the disastrous effects of the IRA, the SMART Prices Act doubles down. Patients, not pharmaceutical executives or investors, are the ones who will ultimately pay the price for Congress’ obstinance by more costly care and worse health.

Philipson is an economist at the University of Chicago who served on the White House Council of Economic Advisers as a member and acting chairman, 2017-20.