Policy Brief: What is HR 3 & Why Should You Care
After sending out our VIP Alert on Pelosi's socialist drug plan, we had a lot of readers reach out and ask for more information on what exactly HR 3 is and what it does. Let's take a bit of time today to cover what this drug pricing bill does and why it will be bad for the United States economy and healthcare system.
Here is a good breakdown of the policy from American Action Forum on HR 3 and its implications for the USA.
To that end, this week House Democrats reintroduced H.R. 3, Speaker Pelosi’s drug price legislation from the 116th Congress. Back in 2019, I actually testified at a House Education & Labor Committee hearing on the relative merits of H.R. 3. (Spoiler alert: I was not impressed.) Let’s briefly consider two issues with H.R. 3.
Let’s set the stage. H.R. 3 proposes to have the government leverage its purchasing power to negotiate better prices for prescription drugs and then apply those negotiated prices to the entire U.S. pharmaceutical market. In requiring negotiation, however, H.R. 3 also uses the prescription drug prices in other countries to set a ceiling for the negotiated price.Regardless of the relative strength of manufacturers’ bargaining position, under no circumstances could the price be more than 120 percent of the average international market (AIM) price, based on the average volume-weighted sales price of the drug in six foreign markets. The AIM price would also be set as the government’s target price for the drug, and the government would be required to accept any price below the AIM price, effectively making 99 percent of the AIM price the floor for the negotiation.
This policy has at least two problems. First, H.R. 3 would import foreign price control regimes—that U.S. policymakers have no role in developing. As a result, H.R. 3 would restrict access to innovative therapies in both the near- and long-term. Countries that aggressively restrict drug prices see substantially reduced access to treatments compared to the United States, such that tying U.S. drug prices to other countries’ risks importing those countries’ well-documented treatment access issues as well. Looking further out, substantial reductions in pharmaceutical industry revenue will have a constraining effect on future drug development.
Second, and more broadly, while the government negotiating for the drugs it purchases doesn’t sound like a boogeyman, as outlined in H.R. 3, it’s not in any real sense a negotiation. As demonstrated in the structure, drug makers would have little leverage in the negotiations—effectively they would have to accept the price the government asks or stop selling their drug in the United States. Of course, the government would have an incentive to continue to allow Americans access to critical medications, but the government would largely be in a position to set prices (based, of course, on other countries’ prices). Federal price fixing would be a notable deviation from how the federal government has traditionally engaged with markets and private companies. It would be especially egregious in this case, where the government would eliminate any sort of market forces at all by setting a single price for the entire country, not just federal programs.
These proposals for “negotiation” ignore the ways that price competition is already present in the American health care system, and particularly in the Medicare Part D program (as outlined in my testimony). Overall, however, the scale of the market interference being proposed here is breathtaking and flies in the face of nearly 250 years of American economic policy. H.R. 3 was bad policy in 2019, and it is still bad policy in 2021.