The Deadly Impact Of Pharma Price Controls

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Posted: Nov 13, 2019 8:11 AM
The Deadly Impact Of Pharma Price Controls

Source: AP Photo/Rick Bowmer

Recently, I shared part of an interview that focused on Mayor Pete Buttigieg’s scheme to give more subsidies to colleges, thus transferring money from poorer taxpayers to richer taxpayers.

Here’s the other part of the interview, which revolved around a very bad idea to copy nations that impose price controls on prescription drugs.

In some sense, this is a debate on price controls, which have a long history (going all the way back to Ancient Rome) of failure.

But my comments focused primarily on the adverse consequences of Pelosi’s approach.

And if you want more details, Doug Badger explained how Pelosi’s approach would backfire in a report for the Heritage Foundation. He starts with an explanation of the legislation.

The Lower Drug Costs Now Act of 2019 (H.R. 3), introduced last week with the backing of House Speaker Nancy Pelosi, D-Calif., would double down on the failures of existing government policies that have distorted prescription drug prices and contributed to higher health care costs. …H.R. 3 would establish a system in which the U.S. government bases prices for cutting-edge drug treatments on those set by foreign governments. The measure would set an upper price limit at 1.2 times a drug’s average price in six other countries (Australia, Canada, France, Germany, Japan, and the United Kingdom). The secretary of health and human services then would seek to “negotiate” prices below that upper limit for at least 25—and as many as 250—drugs each year. …A manufacturer that declined to negotiate the price of any of its products would incur an excise tax of up to 95% of the revenues it derived from that product in the preceding year.

Doug then warns against an expansion of government power.

The bill represents an unprecedented exercise of raw government power. The federal government already imposes price curbs across a range of programs, requiring manufacturers to pay the government rebates… These provisions all are confined to federal programs, but nonetheless have distorted drug prices throughout the health sector. It’s one thing for the government to dictate the prices it pays in programs it finances. It is quite another for the government to impose a price for a product’s private sale and to extract money from a company on a long-ago settled transaction.

He then concludes by showing some of the negative consequences.

…aggressive government price-setting has damaged innovation and limited access to new treatments in all six of the countries whose price controls the bill would import. If the U.S. adopts price controls, it risks the same results here. Access to new drugs is much greater in the U.S. than in countries with price controls, in part because of having shunned price controls. …This lack of access can have damaging effects. A study by IHS Markit…concluded that Americans gained 201,700 life years as a result of faster access to new medicines. …Countries with price controls also suffer a decline in pharmaceutical research and development. In 1986, European firms led the U.S. in spending on pharmaceutical research and development by 24%. After the imposition of price control regimes, they fell behind. By 2015, they lagged the U.S. by 40%. …the president’s Council of Economic Advisers…concluded that while price controls might save money in the short term, they would cost more money in the long run. Government price-setting, it wrote, “makes better health care costlier in the future by curtailing innovation.”

As you can see, price controls have a deadly effect in the short run (the 201,700 life years).

But as I stated in the interview, the far greater cost – in terms of needless deaths – would become apparent in the long run as new drugs no longer come to market.

By the way, it’s not just me, or folks on the right, who recognize that there will be adverse consequences from price controls.

Writing for left-leaning Vox, Sarah Kliff acknowledges that there are trade-offs.

The United States is exceptional in that it does not regulate or negotiate the prices of new prescription drugs when they come onto market. …And the problems that causes are easy to see, from the high copays at the drugstore to the people who can’t afford lifesaving medications. What’s harder to see is that if we did lower drug prices, we would be making a trade-off. Lowering drug profits would make pharmaceuticals a less desirable industry for investors. And less investment in drugs would mean less research toward new and innovative cures. …In other words: Right now, the United States is subsidizing the rest of the world’s drug research by paying out really high prices. If we stopped doing that, it would likely mean fewer dollars spent on pharmaceutical research — and less progress developing new drugs for Americans and everybody else.

Here’s a chart from her article, which I’ve modified (in red) to underscore how other nations are free-riding because American consumers are picking up the tab for research and development.

By the way, I have no idea where the red lines actually belong. I’m just trying to emphasize that consumers who pay the market price (or closer to the market price) are the ones why underwrite the cost of discovering new drugs and treatments.

And Ms. Kliff definitely agrees this trade-off exists.

Every policy decision comes with trade-offs… If the United States began to price regulate drugs, medications would become cheaper. That would mean Americans have more access to drugs but could also expect a decline in research and development of new drugs. We might have fewer biotech firms starting up, or companies deciding it’s worth bringing a new drug to market. …Are we, as a country, comfortable paying higher prices for drugs to get more innovation? Or would we trade some of that innovation to make our drugs more accessible to those of all income levels?

For what it’s worth, I don’t actually think there’s much of a trade-off. I choose markets, both for the moral reason and because I want to maximize long-run health benefits for the American people.

P.S. Because pharmaceutical companies got in bed with the Obama White House to support Obamacare, some people may be tempted to say Pelosi’s legislation is what they deserve. While I fully agree that it’s despicable for big companies to get in bed with big government, please remember that the main victims of Pelosi’s legislation will be sick people who need new treatments.