Drug Price Controls Will Embolden China at Your Expense

In late July, the Senate passed the $280 billion CHIPS Act to give the semiconductor industry funding to compete with China and protect U.S. national interests. Then, on the same day, Senate Majority Leader Chuck Schumer and Sen. Joe Manchin announced a deal to revive a budget reconciliation bill with drug price controls that, in stark contrast, would help China compete and take market share from the U.S. biopharma industry.

The short supply of microchips and need for broad access to COVID-19 vaccines plainly shows how both the semi-conductor industry and the biopharma industry are critical to U.S. national interests. Yet, there’s not enough discussion on how drug price controls would undermine those interests. This discussion is especially important now that a deal appears to be moving forward after gaining approval from Sen. Kyrsten Sinema.

To help jumpstart that discussion, I coauthored a new report with my colleague John Phelan at Center of the American Experiment which highlights how drug price controls would weaken the U.S. drug industry’s global leadership position and give China the opportunity to control greater market share to advance their national interests. 

The package of price controls in the budget reconciliation bill would require Medicare to set prices for certain high-cost drugs and require drug manufacturers to pay rebates to the federal government when price increases exceed inflation. It uses the term “negotiation,” but it operates as a strict price control. That’s because excessive penalties on drug manufacturers for not negotiating make it a negotiation drug companies can’t refuse. Meanwhile, the inflation rebates impose price controls on nearly all drugs covered by Medicare Part D, as well as brand drugs and biologics covered by Medicare Part B. 

Europe’s drug manufacturing industry used to be the global leader, but this leadership position eroded over the past three decades and the U.S. now stands on top.  Over the most recent five-year period from 2016 to 2020, the U.S. accounted for 138 of the new chemical and biological drug entities, followed by Europe at 64. Twenty years ago, Europe was on top.

The budget reconciliation bill’s strict price controls create a serious risk that the U.S. drug industry might follow in Europe’s footsteps. 

Price controls are regularly cited as one factor behind Europe’s decline. Research shows price controls impact where drug companies decide to locate and invest. By adopting price controls in line with other countries, the U.S. would be giving up this competitive advantage.

Without this competitive advantage, other countries will be positioned to better compete for greater market share and China is possibly best poised to take advantage for several reasons. 

To start, China’s communist government has more power and drive to increase industrial policy spending to support this critical sector. When urging congressional support for the CHIPS Act, Commerce Secretary Gina Raimondo and Defense Secretary Lloyd Austin highlighted how China “has already spent $150 billion on its semiconductor industry.” Likewise, as our report shows, China has prioritized a portion of its industrial policy spending to support the biopharma sector in each of its major industrial policy initiatives since the mid-2000s.

China’s growing share of the global pharmaceutical market also puts it in a stronger position. Domestic markets tend to be easier and less costly to enter, meaning this growing market share will give companies headquartered in China more opportunities to use this domestic advantage.

Finally, China’s active efforts to steal intellectual property from drug companies gives it another ongoing advantage. 

As China gains a control over a greater share of new drugs, it will undoubtedly use that control for diplomatic leverage just as it did with access to COVID vaccines. Last year China pressured several countries to sever ties with Taiwan in return for vaccines and, in December, Nicaragua eventually capitulated.

In gaining successful passage of the Endless Frontier Act through the Senate last year, Senate Majority Leader Chuck Schumer noted, “Whoever harnesses the technologies like AI, quantum computing, and innovations yet unseen, will shape the world in their image.” He then fittingly asked, “Do we want that image to be a democratic image? Or do we want it to be an authoritarian image, like the one [Chinese] President Xi would like to impose on the world?”

That’s exactly the question the U.S. Senate must address as it debates imposing price controls on U.S. drug manufacturers.

Peter J. Nelson is a Senior Policy Fellow at Center of the American Experiment where he focuses his attention on the intersection of state and national health care policy. From late 2017 until 2021, he served as a Senior Advisor to the Administrator at the Centers for Medicare & Medicaid Services (CMS).