Price controls

Price Controls Will Slow Drug Innovation

Ballot box is the wrong place to debate drug-price intricacies, in California or anywhere else.


The California state legislature has a habit of legislating by anecdote. Assembly members or senators may have a bad experience at a state agency or with private industry and they write a bill to address it. Often, legislators offer proposals based on the latest news cycle. Ultimately there are hearings, a long vetting process and the silliest stuff usually fades away.

Unfortunately, the same anecdotal approach is infecting the initiative process, as shown by a measure that recently qualified for the ballot. Called the California Drug Price Relief Act, the measure, slated for the November 2016 general-election ballot, would impose strict price controls on the prescription drugs purchased by the state government.

Reports suggest it would affect drug purchases for around 5 million people, ranging from some Medi-Cal recipients to retired government employees. The initiative would tie the price of state-purchased prescription drugs to the price paid by the U.S. Department of Veterans Affairs. Backers of the proposal tout it with populist rhetoric.

"Excessively priced drugs continue to be an unnecessary burden on California taxpayers that ultimately results in cuts to health care services and providers for people in need," according to the initiative's findings. "Inflated drug pricing has led to drug companies lavishing excessive pay on their executives."

Although the initiative doesn't mention it specifically, there is an anecdote driving the movement for price controls. A New York pharmaceutical company, run by a flamboyant young executive, purchased an HIV drug for $55 million – then raised the per-pill price from $13.50 to $750. It sparked a backlash and condemnation from presidential candidates and others.

Initiative backers claim that national prescription-drug spending has increased more than 800 percent in the last 23 years – and that spending on specialty medications has gone up by more than 23 percent last year. Of course, spending and price increases are not always the same thing. One possible reason there's so much more spending on specialty drugs is that manufacturers have come up with so many more of them to spend on, but it taps into real concern about rising drug prices.

Critics make some obvious points. Is it wise to let officials at one (often-troubled) government agency determine the price of such important products? The initiative would create an incentive for drug companies to hike the prices they charge the VA given it would have a ripple effect. State officials told Southern California Public Radio that they even don't always know what the VA pays for drugs, which is the equivalent of leaving it up to the Wizard of Oz.

"Drug price controls would stifle the introduction of valuable new drugs, because innovators will spend less pursuing new drugs if they expect to earn fewer rewards from discovering them," wrote University of Southern California pharmacy professor Darius Lakdawalla in The New York Times. Drug prices would fall by 20 percent, "but innovation would fall by even more. Patients would see their lives cut short by delayed or absent drug launches."

Other countries, such as Canada, have price controls. But they become what economists call "free riders," by living off of the innovation paid for by consumers elsewhere. As Reason points out, the price of generic drugs has been falling, even though the price of brand-name prescription drugs have been rising. The magazine calls for speeding up the FDA approval process, and encouraging more competition, which is why competitive non-name-brand drug prices are falling. That's a more nuanced argument unlikely to make it into anyone's campaign ads.

Consumers pay more directly for their drugs than for other medical services, which some say is sparking the outrage even if pharmaceuticals are an overall small share of health spending. Consumers don't see the investment and risk that goes into developing experimental treatments. Navigating the regulatory regimen is "hugely expensive," said Ian Adams, Sacramento director of the R Street Institute, a right-of-center think tank. This is "some of the most sophisticated science going on in the world" and researchers don't know if any investment will pay off.

Last session, legislators introduced AB 463, which would have required drug companies to detail the profits and expenses on the development of all treatments that cost more than $10,000. It failed, but it was part of this same anti-gouging approach epitomized in the drug-price ballot initiative.

That legislation was mostly symbolic and even the drug initiative is limited in that it applies only to state government purchases. If it passes, it probably won't distort the U.S. drug market, "but it would not be unprecedented for a bad idea to start in California and take hold elsewhere," Adams added. And it wouldn't be unprecedented for such an important and complex matter to be decided by voters who are reacting to an anger-inducing anecdote.

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  1. First on the first. Happy New Year!

  2. What’s funny about the Daraprim fiasco is that not long after that, a competitor released a similar drug for $1 a pill. But that didn’t get nearly the level of public outrage that the original story did. Most people probably aren’t even aware that it happened, and they’ll all rush to the polls to vote for Bernie so that he can give us all “free” healthcare.

    1. And that Turing had a monopoly on Daraprim because they made it impossible for potential competitors to prove substantial equivalence to the FDA, a legal requirement for selling a generic.

  3. What’s funny about the Daraprim fiasco is that not long after that, a competitor released a similar drug for $1 a pill. But that didn’t get nearly the level of public outrage that the original story did. Most people probably aren’t even aware that it happened, and they’ll all rush to the polls to vote for Bernie so that he can give us all “free” healthcare.

  4. innovation would fall by even more (than 20%).

    1. Why do the american taxpayer have to sublimest the world by paying the highest prices for medications? No other country pays the high price for prescription drugs then the U.S. No Canada, not France, Not Germany no other country.
      what Bull! Extortion. But don’t worry the american public only gets angry when an animal is killed.

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  6. Navigating the regulatory regimen is “hugely expensive,”

    And the Drug companies like it that way. Which is why the move from “safe” to “safe AND effective” was not opposed by the drug companies. “Effective” is very expensive to prove.

  7. You know what raises the cost of getting drugs?

    Having to go back to the doctor every time you need to refill a narcotic Rx.

    Have bronchitis so bad you need heavy narcotic cough medicine (not codeine)? Great. But you have to go back to the doctor every 4 days to get a refill because, by law, pharmacies aren’t allowed to give automatic refills.

    So rather than 1 doctor visit in a 3 week span, you need 5. Which means 5 copays plus 5 insurance payments.

    All in order to NOT stop a drug addict from getting his drugs.

  8. I would accept this article’s argument, if we had a free market health care system.

    Unfortunately, we are so far removed from even the possibility of a free market health care system that at this point, your argument about price controls on drugs is moot. When we as a society deal with the overriding issues with the US’s health care system and can actually return it to a market, we will have to add drug pricing to the solution list.

    Otherwise, it’s not like they are going to make it better by any legal idea they have (or even by leaving it alone). The legislators are going to pass something, get the sound bite, and it’ll be like it was before: Jacked up.

    1. Yep. America needs to break the doctors’ labor union, the AMA.

      1. Fuck the medical mafia with a rusty pipe.

        Vote Woodchipper 2016

  9. Why is it the wrong place? If your going to have a public health system, the public needs to decide how to avoid going bankrupt. That’s not going to be a subtle or informed process, and it is going to lead to bad outcomes, that’s the nature of public spending. But it’s still better than no limits or government by experts.

    This is not a price control, it is a public spending control, and we’ll need a lot more of those in the future, given Obamacare and entitlements.

  10. What articles like this fail to recognize is that the US FDA is not the prime mover here. The article makes it seem as if the world consists of the US and a remote outpost called “Canada”, where drugs are free because they don’t do any research or respect intellectual property.

    In reality, the European Medicines Agency and the separate regulators in each member state are prime movers. Their governments will pay hundreds of thousands of dollars for a year’s supply for a single patient if there is no other treatment available.

    This has a huge impact on R&D for international drug companies. FDA doesn’t care about “quality of life” issues, just efficacy. But if you want to convince the Germans that it is worth adding the cost of that drug to their national health system, you need to pull out all the stops.

    US price controls would have to be seen in the context of a global market where prices are mainly set by government agencies that are willing to pay for the right product. Many companies may just refuse to sell at a loss in California, when there are billions of Europeans and a growing number of Asians who will pay much more (in taxes) to get access to the new treatments that are coming faster and faster. This is a golden age for pharma and biotech research, and a few idiot legislators and pandering presidential candidates aren’t enough to stop it.

    1. There are so many things wrong with what you said that it’s hard to know where to begin. There are about 700 million Europeans, not “billions”. Many Europeans, including Germans and the Swiss, do not “pay taxes” for health care, they have regulated private insurance plans . On the other hand, drug prices are strictly regulated in much of Europe, and Europeans probably across the board pay a lot less for drugs than Americans.

      Your analysis of what this will do to future drug development is also wrong. The legislation affects public health plans only. If California sets the prices too low, it will simply cause drug companies to refuse to sell to those public health plans. That’s a good thing, since if those drugs are worthwhile to have, it will encourage people to buy supplemental private insurance and drive the system back towards a more market oriented system.

      1. I think you are overlooking at least two points:

        (1) By the time people knew that they needed a drug not available from a public health plan, it would be too late for them to buy supplemental insurance.

        (2) To the extent that we are talking about Medicaid recipients here, they probably cannot afford such insurance anyway.

  11. Any attempt to keep bankers from owning monopolies on drugs developed 60 years ago and charging $5000 per pill will somehow stifle medical research, much of which is paid for on federal grants anyway.

  12. That is an absolute lie. No other country pays the extremely high prices for prescription drugs. France Germany, Canada no other country is allowed to extort there citizens the way the US government allows the drug companies to profit off the misery of the citizens. What’s so very sad is the american people only show outrage when an animal is hurt. Allowing various american corporation to fleece and skim money from people who can not afford medicine and are not allowed to get medicine from outside the US for a cheaper price is criminal. The CEO’S should be arrested and jailed along with the politician that enable there criminal behavior.

  13. I’m glad to see so much pushback against this article.

    It’s perfectly reasonable for people being gouged by government enabled and enforced monopolies to turn to the political process to limit those costs.

    It’s kosher to complain about price controls in an otherwise free market, but in a regulated and protected market, they’re required to provide some check on monopoly pricing.

    How about Reason start writing articles about actual health care freedom instead of this whine from the medical mafia that the government might limit how much the government allows them to shake down consumers in their government protected market?

    1. Well said. The article does seem to miss the point.

  14. what bugs me about this nonsense is the people complaining about healthcare costs are the same people complaining about too many different kinds of deodorant. the idea that a lot of one thing necessarily means less of something else is wrong, but say we grant that that much deodorant is a waste of money; what the fuck are we trying to save money for? healthcare costs a lot, in large part due to govt mismanagement (so i have an awfully hard time seeing that as a justification for more govt intervention), but if we’re going to spend like a fifth of our money (around) on something, shouldnt it be something important? and again, I thought everybody read harrison bergeron in high school. we can’t make everyone awesome at everything, or everything awesome for everybody. all you can do, if equality is really your goal, is hold everyone down to the lowest common denominator.

  15. america develops by far the most new drugs, and of course developing new drugs is expensive. we should just stop subsidizing the rest of the world

  16. Talking about price controls where you have government-enforced and government-created monopolies is very different than talking about price controls where you otherwise have free competition.

    Some think that the government must provide private-sector actors monopoly rights in order to incentivize innovation in the form of patents. Whether this is true or not, this view certainly represents a large decrease in the individual freedom that people would ordinarily and naturally have. In a state of nature without government interference, people would be free to imitate each other to the extent they found it individually advantageous. Saying that people have their natural rights decreased in this area because it is better for society because we will get increased innovation may or may not be true. But let’s not pretend that we are doing anything other than deciding to sacrifice some amount of individual freedom in exchange for our hope that we will get an increased amount of socially beneficial innovation.

    In this context, to say that it is unwise to allow price controls on the grounds of increasing freedom would seem to me a very misplaced argument. We are allowing the patent holder or the FDA license holder with a special ability to decrease the natural freedom of others. To then say that, as the beneficiary of government aggression, the patent holder must also be free from regulation of their government-granted special rights strikes me as nothing more than hypocrisy.

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  18. Agreed with a few of the comments here – legislating ways to reduce the cost of government medicine isn’t exactly an addition to the socialist moment. It’s certainly bad that we have government medicine, but once it’s there the taxpayer dollars it pays out to vendors should certainly be controlled as much as humanly possible, unless it involves literally compelling the vendors to sell with force.

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