Subsidies and Price Controls Aren't the Answer to Skyrocketing Prescription Drug Prices
Prescription drugs are getting more and more expensive thanks to the needlessly complex interplay of intellectual property, public funding, and FDA regulation.
At a dinner with business leaders last Tuesday, President Donald Trump promised to do "something" to get drug prices "down really substantially," reports Reuters.
But what, exactly? This isn't the first time the president has threatened to shake up the complex world of prescription drug pricing. And even though policy details aren't really his forte, Trump seems to favor the use of government coercion rather than market forces. Trump railed against Big Pharma, accusing them of "getting away with murder" during his 2016 campaign. More recently, he browbeat Pfizer into reversing some of their drug price increases and released a rather ambiguous "blueprint" to bring down drug prices.
Despite what the president would have you believe, the problem of high drug prices is not one with a simple solution. Subsidies and price controls, options that Trump seems to favor, could slow innovation and hamper progress in the industry. If Trump really wanted to bring down drug prices, that "something" must address the problems of government overreach, including the public funding of prescription drugs, drug patents, and the web of regulation engendered by the Food and Drug Administration—a combination of factors affecting both the supply and demand sides of the equation.
On the demand side, Medicare and Medicaid artificially increase demand for drugs by using tax dollars to subsidize consumption. That enables large pharmaceutical companies to raise their prices without suffering any meaningful decrease in their sales. Medicare Part D, for instance, was enacted in 2003 to help seniors afford prescription drugs, but it has actually trigged the opposite effect. A report from the American Association of Retired Persons, a senior citizens interest group, surveyed 528 medications many older adults take daily and found that "the average retail price was $12,951 in 2015, more than three times the average price for such drugs in 2006."
"Medicare part D has opened the floodgates for higher prescription prices," says Mark Thornton, a senior fellow at the Mises Institute and an expert on drug regulation. "The prices for cancer drugs are simply outrageous, but the government continues to pay despite no guarantee they will work."
In addition, these programs aren't cheap. In 2016, we spent $672.1 billion on Medicare and $565.5 billion on Medicaid, but healthcare and pharmaceutical costs remain stubbornly high, and are increasing.
The Trump administration's blueprint endorses price "negotiation" through these federal programs, but this is nothing more than government price controls. These controls might lead to lower prices, but they would almost certainly cause pharmaceutical companies to scale back their research into drug development. As Reason's Ronald Bailey discussed back in January, "If price controls pressure the U.S. industry into a more conventional process industry model, like that of the chemical industry, pharmaceutical R&D budgets would be slashed."
Another problem is the drug patent system, which was conceived to ensure the welfare of American consumers, but now seems to advantage large pharmaceutical companies. Because drug companies are given the opportunity to monopolize drug markets and charge exorbitantly high prices, they are able to freeze out competition that might drag prices down.
"If a manufacturer of acetaminophen, for example, wanted to charge a thousand dollars a tablet, they wouldn't sell any tablets," says Gilbert Berdine, associate professor of internal medicine at Texas Tech and a faculty affiliate with Texas Tech's Free Market Institute. "It would be pointless for them to do that, because a competitor would capture the entire market by underpricing them."
The White House, however, seems to recognize the issue of extended patents. "Lower-cost drugs are kept out of the market by drug companies gaming regulatory processes and the patent system in order to unfairly maintain monopolies," reads the administration's proposal. Serious patent reform would require congressional action, but Trump is right to urge the House and Senate to work on legislation to roll back the arcane patent laws that dominate the pharmaceutical industry.
Drug companies will argue that patents incentivize investment. That's true. By disproportionately increasing the rewards for producing specific goods, the government essentially offers a subsidy of sorts to drug companies, which certainly boosts production. However, this subsidy, like all others, transfers investment from productive sectors of the economy to the pharmaceutical industry, who don't have to fear the consequences of competition that control other industries.
"There have been pharmaceutical developments long before there were patents and there would continue to be pharmaceutical developments in the absence of patents," Berdine says.
Atop this milieu of subsidies, the government restricts supply with a smorgasbord of regulations, mostly promulgated by the FDA, that restricts competition and stymies the discovery process of the market.
"The FDA hampers innovation by requiring extensive and expensive testing," continues Thornton, "There are tons of drugs and devices that work and would be at low prices and would definitely save and improve lives, but they are unavailable because of the FDA."
Trump's FDA Commissioner, Scott Gottlieb, has gained a reputation for his relatively speedy drug approvals, but that doesn't address the underlying cause of having a massive, bureaucratic agency dedicated to limiting competition in the industry. According to the BrightFocus Foundation, a non-profit focused on supporting medical research, the costs for trials demanded by the FDA can cost hundreds of millions of dollars. This serves as a formidable barrier of entry to startup drug companies looking to introduce potentially life-saving drugs to the marketplace. Massive pharmaceutical companies can afford these regulations, but smaller competitors cannot. This dynamic expands the monopolization of pharmaceutical giants, who can dragoon consumers and insurance companies into paying heavily amplified prices.
Skeptics of laissez-faire are quick to point out the possibility of dangerous drugs being released in the absence of an all-powerful regulatory agency. The FDA's litany of rules might stop some bad drugs from reaching consumers, but the discipline of the market is a far more effective regulator than a gang of Washington bureaucrats.
"Dangerous drugs that hurt or killed people would lead to lawsuits, not to mention the loss of good will. Ineffective drugs might hang around via the placebo effect, but would probably be competed away in the long run," argues Thornton.
Trump seems to have a strong penchant for economic deregulation, and if he were to apply this to the pharmaceutical industry, he just might be able to make real progress on an issue that's stumped many an administration before his.
"The market is a beautiful thing," says Berdine, "one layer of regulation after another is not going to fix the problems created by the previous layer of regulation."
