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You can expect dysfunction when government intervenes in markets, and health care markets are no exception. The result is typically over-regulation, increased industry concentration, lower-quality care, longer waits, and higher costs to patients and taxpayers. The pharmaceutical industry is one of several tempting punching bags for ambitious politicians eager to “do something” in the health care arena. These firms, however, have produced many wonderful advances over the years, incurring huge research, development, and regulatory costs in the process. Reasonable attempts to recoup those costs often means conspicuously high prices, which puts a target on their backs for the likes of those willing to characterize return of capital and profit as ill-gotten.

Biden Flunks Econ … Again

Lately, under political pressure brought on by escalating inflation, Joe Biden has been talking up efforts to control the prices of prescription drugs for Medicare beneficiaries. Anyone with a modicum of knowledge about markets should understand that price controls are a fool’s errand. Price controls don’t make good policy unless the goal is to create shortages.

The preposterously-named Inflation Reduction Act is an example of this sad political dynamic. Reducing inflation is something the Act won’t do! Here is Wikipedia’s summary of the prescription drug provisions, which is probably adequate for now:

Prescription drug price reform to lower prices, including Medicare negotiation of drug prices for certain drugs (starting at 10 by 2026, more than 20 by 2029) and rebates from drug makers who price gouge… .”

The law contains provisions that cap insulin costs at $35/month and will cap out-of-pocket drug costs at $2,000 for people on Medicare, among other provisions.

Unpacking the Blather

“Price gouging”, of course, is a well-worn term of art among anti-market propagandists. In this case it’s meaning appears to be any form of non-compliance, including those for which fees and rebates are anticipated.

The insulin provision is responsive to a long-standing and misleading allegation that insulin is unavailable at reasonable prices. In fact, insulin is already available at zero cost as durable medical equipment under Medicare Part B for diabetics who use insulin pumps. Some types and brands of insulin are available at zero cost for uninsured individuals. A simple internet search on insulin under Medicare yields several sources of cheap insulin. GoodRx also offers brands at certain pharmacies at reasonable costs.

As for the cap on out-of-pocket spending under Part D, limiting the patient’s payment responsibility is a bad way to bring price discipline to the market. Excessive third-party shares of medical payments have long been implicated in escalating health care costs. That reality has eluded advocates of government health care, or perhaps they simply prefer escalating costs in the form of health care tax burdens.

Negotiated Theft

The Act’s adoption of the term “negotiation” is a huge abuse of that word’s meaning. David R. Henderson and Charles Hooper offer the following clarification about what will really happen when the government sits down with the pharmaceutical companies to discuss prices:

Where CMS is concerned, ‘negotiations’ is a ‘Godfather’-esque euphemism. If a drug company doesn’t accept the CMS price, it will be taxed up to 95% on its Medicare sales revenue for that drug. This penalty is so severe, Eli Lilly CEO David Ricks reports that his company treats the prospect of negotiations as a potential loss of patent protection for some products.

The first list of drugs for which prices will be “negotiated” by CMS won’t take effect until 2026. However, in the meantime, drug companies will be prohibited from increasing the price of any drug sold to Medicare beneficiaries by more than the rate of inflation. Price control is the correct name for these policies.

Death and Cost Control

Henderson and Hooper chose a title for their article that is difficult for the White House and legislators to comprehend: “Expensive Prescription Drugs Are a Bargain“. The authors first note that 9 out of 10 prescription drugs sold in the U.S. are generics. But then it’s easy to condemn high price tags for a few newer drugs that are invaluable to those whose lives they extend, and those numbers aren’t trivial.

Despite the protestations of certain advocates of price controls and the CBO’s guesswork on the matter, the price controls will stifle the development of new drugs and ultimately cause unnecessary suffering and lost life-years for patients. This reality is made all too clear by Joe Grogan in the Wall Street Journal in “The Inflation Reduction Act Is Already Killing Potential Cures” (probably gated). Grogan cites the cancellation of drugs under development or testing by three different companies: one for an eye disease, another for certain blood cancers, and one for gastric cancer. These cancellations won’t be the last.

Big Pharma Critiques

The pharmaceutical industry certainly has other grounds for criticism. Some of it has to do with government extensions of patent protection, which prolong guaranteed monopolies beyond points that may exceed what’s necessary to compensate for the high risk inherent in original investments in R&D. It can also be argued, however, that the FDA approval process increases drug development costs unreasonably, and it sometimes prevents or delays good drugs from coming to market. See here for some findings on the FDA’s excessive conservatism, limiting choice in dire cases for which patients are more than willing to risk complications. Pricing transparency has been another area of criticism. The refusal to release detailed data on the testing of Covid vaccines represents a serious breach of transparency, given what many consider to have been inadequate testing. Big pharma has also been condemned for the opioid crisis, but restrictions on opioid prescriptions were never a logical response to opioid abuse. (Also see here, including some good news from the Supreme Court on a more narrow definition of “over-prescribing”.)

Bad policy is often borne of short-term political objectives and a neglect of foreseeable long-term consequences. It’s also frequently driven by a failure to understand the fundamental role of profit incentives in driving innovation and productivity. This is a manifestation of the short-term focus afflicting many politicians and members of the public, which is magnified by the desire to demonize a sector of the economy that has brought undeniable benefits to the public over many years. The price controls in Biden’s Inflation Reduction Act are a sure way to short-circuit those benefits. Those interventions effectively destroy other incentives for innovation created by legislation over several decades, as Joe Grogan describes in his piece. If you dislike pharma pricing, look to reform of patenting and the FDA approval process. Those are far better approaches.


Note: The image above was created by “Alexa” for this Washington Times piece from 2019.