Why price controls will lead to fewer life-saving drugs
Last November, I criticized Nancy Pelosi’s plan to impose European-style price controls on pharmaceutical drugs in the United States.
I wasn’t the only one opposed to Pelosi’s reckless idea.
We have 40 centuries of experience proving that price controls don’t work. The inevitable result is shortages and reduced production (sellers will not produce sufficient quantities of a product if they are forced to lose money on additional sales).
Which helps to explain why the the Wall Street newspaper Wasn’t a fan of Pelosi’s proposal either.
Here is part of the journal’s editorial on the detrimental effects of his proposed intervention:
Ms. Pelosi’s legislation would order the Secretary of Health and Human Services to “negotiate” a “fair price” with drug manufacturers … Any company that refuses to negotiate would face a 65% excise tax on its sales annual gross which would increase by 10% each quarter. Yes, 65% on Sales. … The bill also establishes a starting point for negotiations on health insurance at 1.2 times the average price of drugs in Australia, Canada, France, Germany, Japan and the UK, all of which have some form of socialized health system. … Foreign price controls have reduced access to revolutionary treatments. … Price controls are also a prescription for less innovation, as they reduce the benefits of risky research and development. … Only about 12% of molecules that go into clinical trials eventually get FDA approval, and those successes have to pay for the 88% that fail. … Price controls would hamper competition by slowing the development of new drugs. The United States accounts for most of the world’s pharmaceutical research and development, so there would be fewer breakthrough therapies for rare pediatric genetic disorders, cancer, or hearing loss.
A damaging indictment of instinctive interventionism, to put it mildly.
Well, a bad Democrat idea like price control doesn’t magically turn into a good idea just because it’s then pushed by a Republican (unless, of course, you qualify as a partisan like defined by my ninth government theorem).
Unfortunately, we now have yet another example of bipartisan foolishness.
Andy Quinlan, of the Center for Freedom and Prosperity, spoke out on President Trump’s misguided plan to adopt European-style price controls:
… Other nations have been free riders in the American innovative pharmaceutical industry. … They adopted socialist price controls to limit what they pay knowing that the bigger market would take over to ensure a steady supply of new life-saving drugs. It must stop, but President Trump’s recent executive order is not the right way to do it. … His executive order of the “most favored nations” to… limit… prescription drug payments made through Medicare… But that’s the wrong way to think about the problem. Other countries engage in theft through price control. … Medicines can take months or even a year longer to arrive in countries with socialist health systems. Patients suffer from it… Another likely consequence is less innovation. Some drugs in this new price environment will no longer be profitable to develop. Patients will suffer again. … Getting foreign jurisdictions to pay their share of pharmaceutical innovation by ending price manipulation is a noble goal. But it shouldn’t come at the expense of industry and American patients.
A study by Doug Badger for the Galen Institute points out that the Trump administration’s approach – for all intents and purposes – would use Obamacare’s so-called Center for Medicare and Medicaid Innovation to impose foreign price controls on drugs. ‘ordinance in the United States:
The Affordable Care Act created CMMI and gave it extraordinary powers. … The statute also protects CMMI projects against administrative and judicial controls. … Two HHS secretaries have claimed power under CMMI to mandate a Medicare Part B payment mechanism without having to seek new legislation. … The Trump administration has issued a Regulatory Proposal Advisory (ANPRM) announcing its intention to come up with a much more radical Medicare Part B drug demonstration project…. To… abandon the ASP Medicare reimbursement methodology in favor of a based on drug prices paid in other countries. … CMS is considering the creation of an “International Price Index” (IPI). It would calculate the IPI based on the average price per standard unit of a drug in some foreign countries.
This is troubling for several reasons:
… The other countries on the proposed list have a lower standard of living than the Americans, measured by the disposable income of households per capita… The median disposable income per capita in the IPI countries is therefore lower by about a third to that of the United States… Reimbursement by Medicare for drugs administered by a physician would be largely based on international benchmarks in which the regulator of a government fixes the prices of drugs based at least on part on those set by regulatory bodies in other countries. … For all the different payment methods that Congress has devised for medical goods and services, it has never based reimbursement on prices in foreign countries. The role of the agency is to implement reimbursement systems established by Congress, not to create them from whole tissues.
As you can imagine, the the Wall Street newspaper also weighed on Trump’s plan.
The editorial points out that there will be very negative consequences if the president imposes European-style price controls:
Mr. Trump signed an executive order that could make … life-saving therapies less likely. Mr. Trump has been threatening drugmakers with government price controls for months. … The President’s order directs the Department of Health and Human Services to require drugmakers to grant Medicare the “most-favored-nation” price (that is, the lowest ) that other economically developed countries pay. … This ignores some crucial details. … Other countries are also having to wait longer for breakthrough therapies, which is one of the reasons the United States has much higher cancer survival rates. … The larger reality is that developing new therapies is not cheap and can take years, sometimes decades, of research. Most products in clinical pipelines fail, and even those that succeed are not guaranteed to produce a profit. … The risk for all Americans is that drug companies will abandon therapies for difficult-to-treat diseases that are in the early stages of development because of the high failure rate and low expected benefits. This risk is most acute for therapies that treat rarer forms of disease… The victims will be the cancer patients of the future, including perhaps some reading this editorial.
The bottom line, as I noted in the interview above and as many others have observed, is that other countries are free-riding American consumers.
They have access to most drugs at low cost (since pharmaceuticals are cheap to produce once they are finally approved).
But the net result, as I tried to illustrate in this edited picture, is that American consumers are funding the lion’s share of new research and development.
It is not fair.
But we would jump from pan to fire if we had European-style price controls that stifled innovation from pharmaceutical companies.
Of course, we would benefit from lower prices in the short term, but we would have less life-saving drugs in the future.
PS There is an analogy between prescription drugs and NATO since Americans bear a disproportionate share of the costs for both. However, there is a strong argument that NATO is no longer necessary. On the other hand, I don’t think anyone thinks it would be a good idea to stifle the development of new drugs.
PPS Instead, a friend urged me to support the idea of using the coercive power of the government to force US drug companies to charge market prices when selling overseas – an approach that would give foreign governments have the choice to pay more or not to take the drugs. Sounds like a better approach, at least in theory, but my friend has no answer when I point out that these companies would then be pressured out of the United States (as many companies did before Trump lowered the corporate tax rate to improve US competitiveness).
This article has been reprinted with permission from International Liberty.