Price Controls Are Not The Answer To Expensive Drugs
Despite their abysmal track record, government solutions are back in vogue. Ostensibly, government’s scale, leverage, and freedom from profit will unlock potential health care savings that are beyond the reach of the private sector.
At their most extreme, reforms such as “Medicare for all” call for a complete government takeover of the health care system. Proponents of single payer reforms claim that only a complete government takeover of the health care sector can eliminate the health care sector’s inefficiencies and ensure 100 percent patient coverage.
Of course, if government’s scale and freedom from having to earn a profit was so effective, then why does FedEx and UPS consistently outperform the U.S. Postal Service? Or, why is Amtrak always teetering on the brink of insolvency? In the health care space, if scale and the freedom from having to pay a profit is so important, why is the health care provided by the Veteran’s Administration and the Indian Health Service so abysmal?
Heightening these concerns, 80 percent of primary care doctors will accept new patients that are covered by private insurance, but only 72 percent will accept new Medicare patients and 45 percent new Medicaid patients. This lower acceptance rate is linked to Medicare’s and Medicaid’s uneconomical reimbursement levels. And, herein lies the rub.
Whether it is state Medicaid programs, the federal Veteran Affairs health system, or nationalized health systems in other countries, government-run health care creates savings by restricting access and reducing the quality of care. It is folly to believe that government will be able to provide high quality health care services at a reasonable cost.
Others preach that, instead of a complete government takeover of the health care system, the best way to lower the cost of health care is through increased government regulations. These piecemeal proposals will identify a specific problem that plagues the health care system, and then offer targeted government programs to address each one.
Take the cost of medicine. In response to the high cost of branded and originator biologic medicines, there has been a bipartisan push to impose price controls on drugs. Here too, history argues that the big-government approach will disappoint its proponents.
In post-revolution France, for instance, the government imposed grain price controls to ease the pain from the grain shortages that were plaguing the country. The price controls not only failed to alleviate the problem, they worsened the shortages and helped create an even greater economic crisis.
Rent control policies also exemplify the adverse consequences from government mandated pricing. The purpose of rent control is to expand the availability of affordable housing. The actual consequences, as exemplified by cities like New York and San Francisco, are housing shortages and sharp declines in housing quality.
No matter where they have been tried, price controls have always made bad situations worse because it is impossible for policymakers to have the necessary knowledge to dynamically set the efficient price level. Just as all of these past price control experiments ended up making a bad situation worse, applying price controls to the U.S. health care sector will further reduce the quality of care and create inequitable outcomes.
The advocates of price controls now are targeting the pharmaceutical industry with these ill-considered policies. Take H.R. 3, the Lower Drug Costs Now Act. As the name implies, the bill’s proponents hope to lower the cost of drugs by empowering the Centers for Medicare & Medicaid Services (CMS) to negotiate prices on certain drugs. Manufacturers who refused to negotiate with the government would face a 95% tax on sales revenue (not profits). Such a lopsided structure is not a negotiation, it is the government mandating a price regardless of its economic viability.
The consequences from implementing price controls on the pharmaceutical industry will be no different than the consequences that occurred in the grain or housing markets. But, one does not even have to look toward these markets to see the consequences. Just look to the European Union’s drug industry, where pharmaceutical price controls were implemented two decades ago.
Before its price controls, EU firms were the global leaders in biopharmaceutical innovation. Since the implementation of price controls, research spending in the EU has stagnated, much of it diverting to the U.S. where price controls do not exist. Over time, these diverging trends have enabled the U.S. to become the global innovation leader.
As a result, the EU has endured many adverse consequences. Access to existing medicines have faltered. While the U.S. has access to nearly 90% of newly launched medicines, patients in Germany only have access to 71%. In France, the access rate is even lower at 48%.
By some estimates, the R&D slowdown has led to 46 fewer medicines being introduced into the marketplace. The actual costs to patients (worldwide) from not having access to new (possibly better) treatments is unknowable. The lost savings potential these medicines could have created, by avoiding the need for other more expensive health care treatments (e.g. surgeries), is also unknowable. The EU has also faced economic consequences as the lost R&D activity has cost the EU nearly 1,700 high paying research jobs.
History clearly illustrates that government mandated prices create more harm than good. Should drug price controls, such as H.R. 3, be implemented, the U.S. will not be exempt from the adverse consequences. Instead, access will be reduced, innovation will suffer, and the economy will be less vibrant.
In contrast to this government approach, as I have discussed here, there is a better way. Too many market barriers currently exist that are inhibiting a more competitive market for medicines (particularly the high-cost biologic medicines) to develop. The best way to achieve the dual goals of incenting innovation and promoting affordability is to remove these barriers and empower a competitive market to directly lower the costs of medicines.