The Medicare Price Caps are the Moral Equivalent of Genocide

Does investment respond to expected profits? Any economist would tell you yes — the cursory application of logic confirms it. If people prefer more profit to less, then they will invest their money in the projects which yield more money than less. And does more investment lead to the creation of more things to sell? Seems obvious it should. All else being equal, more research should result in finding more ideas compared to fewer.

So why do we not extend this logic to the Medicare price caps?

i. The proposals

Part of the Inflation Reduction Act was a proposal for Medicare to negotiate the price of some of its most commonly prescribed medicines, in order to control the price. The list of drugs to be negotiated can be found here: they are the ten most expensive drugs for Medicare by revenue.

I should say “negotiations” with scare quotes, for they are nothing of the sort. The government and the drug company shall meet and discuss things, and the government will say the price they wish to pay. The drug company could refuse it — but if they do so, the drug will have a 95% excise tax imposed on all revenue — not profit, revenue — and the drug company as a whole will be barred from selling any medication whatsoever to Medicare. The excise tax cannot even be deducted from income tax (Adams 2021), so selling the drug at all in the United States would be money losing. Medicare is also responsible for about a third of all drug sales in America, so it’s hard to say what would even be the bigger source of loss. I am doubtful that there is any price too low for a drug company, under such strictures. 

The other proposal is to allow certain states to import drugs from Canada, paying the prevailing prices in Canada. These are still high by global standards, but are considerably lower than the United States. Currently, only Florida has been approved, with seven other states also negotiating with the FDA for permission. 

The point of these regulations is to reduce the price we, as a society, pay for medication. It is not intended to redistribute the cost of high medicine on to more fortunate individuals. It is bluntly intended to reduce the profits of the pharmaceutical companies. The size of this is massive, too. Ho and Pakes (2024) find that if the eight states alone were able to reduce their prices paid by Medicare from the current US level to the Canadian level, it would cause a 16% fall in total pharmaceutical company revenue. Yes, total. That’s a 25% fall in global pharmaceutical profits. The United States alone accounts for more than half of all pharmaceutical revenue. We are not the small, open economy which has no impact on the world market. We determine how much investment into pharmaceuticals there will be. There is no way around it. 

ii. The evidence against

Everything we know about the world is unanimously against it. A few papers will suffice to make my point. Acemoglu and Linn 2004 use plausibly exogenous variation in market size to estimate the elasticity of research and development to expected profits. Presumably, demographic changes are unrelated to where scientific breakthroughs take place — if the population becomes older on average, and then all of a sudden more breakthroughs in drugs to fight diseases of old age take place, it makes sense to ascribe that to companies changing their investments. They find that each 1% increase in market size leads to a 4% increase in new pharmaceuticals coming to market — an astonishingly large finding. Measuring inputs rather than outputs, Finkelstein (2004) found that changes in required vaccines led to large increases in investment into finding new vaccines. Specifically, it led to a 2 and a half fold increase in new clinical trials. The more macroeconomic estimates agree. Abbott and Vernon (2005) estimate that a 40-50 percent cut in drug prices in the US would lead to a 30-60% decrease in new projects being attempted.

And what might the human toll be? We shall stick to the United States for a tidy demonstration of the enormous scope. According to Buxbaum et al. 2020, pharmaceuticals added a bit over a year of life expectancy between 1990 and 2015. Following along with Ho and Pakes, there were 48 million live births between 2005 and 2015. With a statistical value of a year of life given at $100,000, the pharmaceutical industry is adding a minimum of 225 billion dollars a year in value. This does not take into account immigrants who are positively affected, nor the value from reduction in morbidity, and still greatly exceeds the total spending on pharmaceutical research — about 75 billion a year. And this is for the United States alone! We have every reason to think that the benefits from new pharmaceuticals are even greater in the undeveloped parts of the world — they need goods which do not require skilled practitioners and can be easily transported across national boundaries. 

iii. And what of the costs?

So let’s suppose we cut prices by 15%. We should expect, drawing from Abbott and Vernon, a 15% reduction in new pharmaceuticals found. Assume the not-found pharmaceuticals are randomly selected. Then in the same decade as before, 2005-2015, not finding those pharmaceuticals would remove about 3,000,000 life years. Given a life-expectancy of 78 years, that is the equivalent of killing 38,000 people. This is for the United States alone. For the world, the losses would be far greater. If we assume that the gains from pharmaceuticals are the same everywhere, and given a world population at the time of 6.5 billion, the price caps, imposed in 2005, would kill 837,000 people over the next decade. Adjusting for a lower life-expectancy in the rest of the world would only increase the death toll, and we have every reason to think the direct benefits are greater elsewhere in the world.

So how’s that for genocide? We teach about genocide in schools today, but cannot see when it occurs right under our noses. We don’t need machetes and hatchets — we need only deny medicine. The people of the United States have descended into vile barbarism. It disgusts me. We as a people have shown a total inability to care about anything other than what we want now. It is not enough that we must kill the global poor to get cheaper medicine now — we must sacrifice the young, and those who are yet to come too. If you are concerned about people who cannot afford medication, then subsidize them. You must spend more, not less. There is no escape from it — finding things costs money, and if you do not spend you will not find. It is intolerably selfish of us. We have shirked our duty. We say that the rich need to pay their fair share — that they who have benefited most from society should do the most to maintain it. And when the times comes for us, the richest in the world, to pay our fair share, we refuse. We want to pass the buck. 

America is better than this. We are not a nation of cowards. We are not a nation of greedy, short-sighted people. We are not a nation unable to think more than one step ahead. We are America, the greatest nation in the world. We saved Europe from the Nazis. We are saving them now from Russia. We have invented most of the reasons life is good. We produce more than anywhere else. We have been the ur-source of liberal idealism, of tolerance, of human rights, and of decent moral values. Are we an America which is stingy? Which would not feed a starving child if it cost us half a dollar? Let us do our duty now. Millions of people die every year from disease. We can stop this! We eliminated smallpox. We are on the brink of eliminating polio and Guinea worm. We are in a war against disease, and are advancing on every front. Now is not the time for disarmament. We must fight on.