'Inflation Reduction Act' Main Impact Is To Cut Health, Not Inflation | Opinion

Senate Democrats unveiled last week a sweeping budget reconciliation package, which they've misleadingly dubbed the Inflation Reduction Act of 2022. Although many economists are obsessing about inflation impacts, its most damaging component by far remains its impact on health. The health care provisions would induce U.S. longevity losses valued very conservatively at more than $66 trillion over the next 17 years, dwarfing all other economic effects including inflation impacts, even if beneficial, as well as deficit reduction.

Economic evidence shows that growth in life-expectancy is as important as GDP growth in lifting U.S. well-being. Put differently, few people would give up a year of their lives in order to gain an inflation-free year with marginally higher growth. Emphasizing the reduced economic effect of the so-called Inflation Reduction Act is akin to rejoicing that a hurricane spared the house, even though its owners died.

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. 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.

Taxpayers currently spend about $17,000 per newly insured person on these ACA subsidies. Those are public resources that could cover more people if spent more wisely, instead of being a de facto corporate welfare program for insurers. Indeed, about 75% of the enhanced subsidies went to people already insured. Many Americans enrolled in Obamacare plans are middle- and even upper-income and already had insurance through their employers, which they dropped to enroll in artificially cheap exchange plans instead. This is why the extra cash was expected to boost the number of insured by only 1.3 million people this year.

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

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

Indeed, the bill is more damaging than standard price controls, as such controls typically allow companies to price up to a ceiling. But there is no ceiling here—companies negotiate with a government which, if its low-ball price is not accepted, can then levy large financial penalties. It's tantamount to you selling your house and if you don't agree to a buyer's low offer, then the buyer keeps part or all of the house.

Senate Majority Leader Chuck Schumer (D-NY) speaks
Senate Majority Leader Chuck Schumer (D-NY) speaks to reporters during a news conference at the U.S. Capitol July 28, 2022 in Washington, D.C. Drew Angerer/Getty Images

The legislation also penalizes drugmakers if they increase their prices at a rate higher than inflation. But this would likely drive prices even higher. If manufacturers are unable to raise prices in the future—even in the event of unanticipated conditions—then they will come to the market with inflated prices in order to hedge their bets.

Ironically, some claim these Nixonian price controls are necessary to combat inflation—yet drug prices have increased just 2.5% over the past year, far below the 9.1% rate of general inflation.

Drug prices are increasing so slowly thanks in part to the Trump administration's successful efforts to slash FDA red tape, which led to a record number of approvals for generic drugs. Generics account for over 90% of all prescriptions, and the resulting increase in competition partly caused pharmaceutical prices to decline in 2018 for the first time in 50 years. This suggests that market forces to cut drug inflation, rather than government controls, are important.

Furthermore, any savings in dollars by the Inflation Reduction Act will be swamped by losses in lives. Over the next 17 years, the bill would reduce drug industry research and development by about $663 billion, resulting in 135 fewer new medicines. This will amount to a loss of 330 million life-years, about 30 times the loss from COVID-19 so far. The associated loss in value is more than $66 trillion, with longevity conservatively valued at half the amount used by agencies such as FDA and EPA. No economic gains have more value than living longer to see those gains.

Losses could include cures for Alzheimer's, cancer, and so much more. Indeed, nearly 50% of today's FDA pipeline is for new cancer medicines—and the bill would cut the amount spent on cancer research by more than nine times as much as Biden's "Cancer Moonshot" initiative raises it.

Lawmakers could better curtail health care costs through supply-side interventions that raise competition and lower prices.

Drugs only make up a couple of percentage points in the overall growth in health care costs in recent years. More important are labor costs: wages for doctors, nurses, administrators, and the like account for more than 70% of total health care spending. One of the most effective ways to reduce health care spending is thus to expand labor supply. Yet the American Medical Association and other special-interest groups lobby to restrict the number of health care workers through onerous education and credentialing requirements. For example, only one in 10 medical school applicants get admitted, and foreign-trained doctors are held at bay.

Supply-side measures would cut health care costs by increasing choice and competition. Many were laid out in a 2019 interagency report from the Departments of Health and Human Services, Treasury, and Labor. The reforms would improve quality of care and reduce the true cost of better health, enabled by new treatments. The Inflation Reduction Act, by contrast, would do the opposite.

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

The views expressed in this article are the writer's own.