REFILL | Tomas Philipson on IRA, Inflation, Real Wages, and COVID Policy Tradeoffs (Originally Aired: June 2, 2023)

DC EKG

In this refill episode of DC EKG, economist Tomas Philipson discusses the economic implications of the Inflation Reduction Act (IRA), its impact on pharmaceutical innovation, and

Key takeaways

• Price controls in the Inflation Reduction Act may lead to a significant decline in pharmaceutical innovation, with potential losses in life expectancy valued in trillions of dollars.
• The U.S. market drives global drug innovation due to its high pricing and large share of returns, making it essential for worldwide medical advancement.

Main topics

• Inflation Reduction Act's impact on drug innovation
• Global pharmaceutical pricing and market dynamics

Notable quotes

"The loss in life is in the trillions from that. So the few things we value more."

"If you ask people, do you want less inflation or do you want to live longer? A lot of people would say the second."

Conclusion

Tomas Philipson warns that policies like the Inflation Reduction Act, while aiming to reduce costs, may severely undermine long-term

Transcript preview

Speaker 2 (0:00) Welcome to DCEKG. This refill episode was originally recorded on June 2nd, 2023, when Tomas Philipson was serving as acting chair of the Council of Economic Advisors in the Trump administration. Since then, the economic and healthcare landscape has continued to evolve, and his predictions about the Inflation Reduction Act's impact on drug innovation and his analysis of fiscal and monetary policy have become increasingly relevant. Here is Joe Groban with then co-host Eric Uland and Tomas Philipson. Speaker 3 (0:33) It's sad because everything gets focused on bureaucrats driving the economy. You know, there's all this Fed watching. And if you look at CNBC and Fox Business, et cetera, all the business networks, it's a lot of focus on these bureaucrats, what they're thinking, what they're doing, what they're speaking for good reasons. They influence markets and they shouldn't be so influential in markets. What should be driving markets is demand and supply, not bureaucrats. Speaker 2 (1:01) This is DCEKG, exploring the intersection of politics and healthcare by diagnosing Washington and prescribing solutions. We take a deep dive into the legislation, regulation, and innovation impacting policymakers, providers, and patients. Now, America's health policy expert, Joe Grogan. Speaker 1 (1:24) Hello, welcome to another edition of DCEKG. I'm Joe Grogan, here as usual with Eric Uland, and we're joined today by a great friend of ours, Tom Phillipson. Tom's been a senior advisor to the Food and Drug Administration, the Health and Human Services Department. He's been a member of the Council of Economic Advisors, and he's run the Council of Economic Advisors, and he's one of the most influential economists. in the country, if not the world, and he's well respected in Washington, D.C. He's published countless academic articles and some of the best recent op-eds on the Inflation Reduction Act and economic policy as it's taking place in Washington, D.C. Eric? Thanks, Speaker 4 (2:12) Joe. And you're right. Tom's had an amazing career with academic credentials second to none. A Ph.D. from Wharton, a professor at the University of Chicago, a visitor at Yale, and fellowships galore. USC, Manhattan Institute, Milken Institute, AEI, Rand Corporation, and on and on and on. He's an award-winning economist, a big brain. I only have a small paramecium up here. And somebody who really needs to be heard as well as a great colleague and a really fun friend to work with when we're all together at the White House. If you want to check out Tom, look him up on LinkedIn, Tomas J. Philipson. No H. In Tomas, Tomas J. Philipson. He's here today with Joe and I to discuss some of the truly disturbing effects of last year's Inflation Reduction Act on innovative drug breakthroughs, give his perspective on the macroeconomy going into 2024, and his views on the COVID-19 lockdowns and what we might learn from that experience. We'll kick off with a conversation about some of his recent op-eds in the Wall Street Journal and The Hill. really powerful writings that focus on how the Inflation Reduction Act could hurt drug development, have negative impacts on really innovative drug discovery, and contain provisions that might allow bureaucrats to run much further field more than what anybody anticipated when the Inflation Reduction Act became law last year. Tom, thanks for being with us. Let's talk a little bit first about how you see the Inflation Reduction Act's impact on innovative drug development here in the United States. Speaker 3 (4:00) Yeah, we kind of wrote an early piece several, you know, a half year, a year ago, I think, on, you know, what would price controls like these, there were kind of different versions of the IRA floating around before IRA got passed. What would they, what would the economic literature say about how much less innovation there will be? But I think the first thing I kind of want to... talk about is that, you know, in D.C., there's a lot of talk about financing of health care versus the big improvements in health care doesn't come necessarily from more Speaker 4 (4:38) money financing. Speaker 3 (4:40) They mainly come from new innovation. Right. So if you think of, you know, HIV patients are now that's a chronic disease used to be a death sentence. Cancer rate survival rates are going up dramatically, particularly in, you know. breast and other types of cancer. And you think about what really improves people's lives in healthcare, as much less to do with financing than it has to do with how much do we actually bring to market in terms of new products. So that I think is being very missed. guided in terms of policy, because policy is also about the dollars and cents, and it is a very short-term view of it. So that's kind of motivated why we did the analysis we did that showed that it would be quite dramatic innovation effects. And we just took the literature and economics and said, what are the, if you take CBO's revenue reduction from the act and impose it on the industry, there's a big literature in economics that says once you get those revenue reductions, How much less research and development do you get? And Speaker 4 (5:48) because this bill was written around financing concerns in general, you're going to have an effect that's pretty pronounced on innovation and drug development, aren't you? Speaker 3 (5:59) Yeah, but the savings are like $250 billion over 10 years. Speaker 4 (6:05) Claimed, right. Speaker 3 (6:06) Yeah, but the loss in life is in the trillions from that. So the few things we value more. Speaker 4 (6:15) And when you say trillions, it's not trillions of people who die, but the quality of life. Speaker 3 (6:20) Yeah, and the reason the numbers get so large for losses in lives is because. That's the thing people care more about. You know, if you ask people, do you want less inflation or do you want to live longer? A lot of people would say the second. So basically, health and life are obviously the most valued things we have. So when you take a hit in those aspects, it many times. swamps, everything else. And that's what I already did. We talk a lot about the growth implications, the lack of inflation implications from the act, the climate implications. Those are trivial implications from the act compared to the value of the lost life or lost health essentially induced by the act. Speaker 4 (7:08) And there, to your point, you're talking about challenges that result from these new revenues, these new taxes, these new levies on the economy, and in particular on the industry, as well as secondarily, some of the distorting effects of provisions within the act itself. Speaker 3 (7:27) Yeah, exactly. So U.S. is unique in that we have more private market pricing. of drugs in the US than other countries. And Medicare has kind of followed that private pricing. That has led us to basically the source. If you innovate anywhere in the world, if you're sitting in China or Sweden or whatever, you're not innovating for your own country. You're innovating for the world market. So Swedish pharma companies don't innovate for 9 million Swedes. They innovate. for the world. And the world is driven by the U.S. market, which is about 70 % plus of the return you make on innovation comes from the U.S. market, even though the U.S. is only about 22 % of world GDP. So it's highly overrepresented in terms of how much it contributes to their rewards from innovating. Speaker 1 (8:26) Tom, how do you view that? A lot of people view that differential as the U.S. is being taken advantage of by foreign governments and, frankly, foreigners, foreign citizens are taking advantage of the American citizens because we're paying higher drug prices. But your point or part of your point is, look, the drug wouldn't exist at all if not for the American market. Is that fair? And how do you view this differential in pricing and the size of the marketplace? Speaker 3 (8:58) Well, I view it as a rational response from other countries, essentially, and that might sound weird. But let's say you're Sweden, right? And you're thinking about price controls on drugs in Sweden. Because Sweden is such a small share of the world market, they will not have any impact on medical innovation with their price controls. So you can literally shut down Sweden and nothing happens to medical innovation. And that's true for a lot of European countries, not necessarily Germany and France, but even the UK is 2 % or 3%. So whatever NICE does in the UK, which is an organization that regulates prices in the UK, whatever they do will not impact innovation much. So they will see the same flow of products coming into their countries, regardless if they're controlling prices or not. Now, if everyone is doing that, then obviously there is a lower world return from innovation. And that's, you know, all the Europeans are doing it. They're implicitly doing. But if you think about a single country, there's no innovation access trade-off for that country. Lowering prices through price controls, holding what other countries do constant, will only increase access without impacting innovation for them. Speaker 4 (10:16) But if you do that with the United States, to your point, You're going to have a significant impact domestically. You'll have a huge impact internationally. And suddenly the rest of the world will be copying us and compounding this challenge as more and more countries directly or indirectly adopt price control regimes. Speaker 3 (10:37) Yeah. So we are a rich country and we're a populous country, right? So we're 330 million people and we're the richest country. One of the richest countries. We're not the richest per capita. Speaker 3 (10:49) The aggregate economy is the largest, obviously, in the world. So what we do will impact world returns. And therefore, it's very different. There's a very different tradeoff for the U.S. doing, you know, what Nice is doing in the U.K. There's a totally different tradeoff. Speaker 4 (11:07) Sorry, Joe, just quickly and then. So what do liberals and the left say in defense of the Inflation Reduction Act? and push back at the consequences of their own legislation here. How does the Biden administration defend against the reality, as you have explained, of how the marketplace really works and the real-life impact of suddenly depressing a whole sector that's life-saving, life-innovating for patients, again, not just in the United States, but around the world? Speaker 3 (11:37) I mean, the rhetoric is that this is saving seniors and taxpayers money, even though... Clearly, it will hurt them in the long run by not having as much health as they would with an absence of the act, which is going to dominate in value any savings to have from the act. But I also think they believe incorrectly Speaker 4 (11:59) that there won't be much of an R &D effect from Speaker 3 (12:05) reduced future profits. So I think, you know, there's a field visit to suggest for congressmen. to a private equity fund or a VC fund or whatever, where the first thing anyone talks about is future earnings from a particular biotech when they start investing in their trials. And those investments in trials are about two-thirds of R &D spending for drugs coming to market. So, you know, they live in a world where investment is not driven by future profitability, which is not the world we live in. Where there's a mountain of data that contradicts that, but that's their claim. Speaker 1 (12:42) Right. To some extent, it's even worse than that because part of the justification for these price controls, I mean, they call them negotiation, but it's really price controls, price setting. Part of their argument in favor is that the drug companies are greedy. Well, if they're greedy, they're motivated by profits, right? And then you expect their behavior is going to change when you limit the profits. but they don't seem to be able to get their head around it. And they're back in this box where they think it's really good politics to bash the pharmaceutical industry. And to your point, they don't think it's really going to affect innovation. And you've written recently in The Hill about the number of drugs that you think are never going to come to market. Do you want to talk about that a little bit, about watching? Yeah, I Speaker 3 (13:26) mean, this came as a response to CBO, where there's something. very fishy going on in how much CBO or how little CBO thinks is going to affect drug innovation. It just does not make sense. So they will have, they claim they have a 12 to 15 % revenue reduction. And if you just take that proportionally to the number of drugs, if that's the, if there's a 12 to 15 % reduction in R &D or 12. 50 % reduction in drugs as a consequence, you will run up against 120 roughly drugs lost, even