It sounds so simple. Prices of “X” (you fill in the blank) are going up too fast, so let’s pass a law that will keep prices down.
In New York, it’s rent control. In 1920, space was at a premium on Manhattan Island, so why not keep rents down by passing a law that sets the price? The result? A century-old, corrupt system that both drives up the cost of non-rent-controlled apartments and creates a black market where people illegally pass along rent-controlled apartments to others.
In the 1970s, a complicated government formula for pricing oil led to gas shortages and long lines at the pumps.
In Venezuela, it’s the “Fair Prices Act” of 2014, when the Socialist government, amidst rampant inflation, banned profit margins of basic goods higher than 30 percent. That caused catastrophic shortages, leading to riots in the streets and people begging for food rations. In fact, there are dozens of examples throughout history in which government was used to control prices.
Although these programs came in many shapes and sizes, they all had one thing in common: They have never worked in the way they were intended.
Yet, the lessons of history mean nothing to those who want people to believe that if only we could impose price controls on prescription drugs, everyone could get the drugs they need at an affordable price. So, once again, legislation is being introduced to create a government-mandated framework for pricing drugs. This legislation, not surprisingly sponsored in the Senate by self-described socialist Bernie Sanders, sounds like it’s a benign effort to allow Medicare to “negotiate” prices for its Part D drug insurance program.
But a look under the hood of this nice shiny car shows that these “negotiations” are to be driven by government mandates that put drugs into different categories. Then, if these “negotiations” are “unsuccessful,” the government sets “fallback prices” that will be adopted automatically.
In other words, price controls. Incredibly, these “fallback prices” will be decided through a complicated formula that includes prices in foreign countries, 10 members of the Organization for Economic Cooperation and Development with similar Gross Domestic Products per capita. It is also worth noting that although these proposals are driven by the high cost of some new “miracle” drugs, that is just an excuse to put most drugs under this price control regime.
These schemes are all based on a false premise, that new advancements in medicine will continue, and all that government has to do is decide what price should be paid for them. In fact, the great advances we have seen in attacking serious diseases have only come after billions of dollars of research over many years.
Often, a new drug does not pan out in tests and companies have to go back to the drawing board and try again. If at the end of this road, price controls hinder the ability of these innovative companies to get a return on their investment, it will inevitably result in a reluctance to make that initial investment.
There are countries that have implemented severe price controls on drugs. Fifty years of failed socialist economic policies that kept India in poverty until they started opening up their economy have not stopped them from applying those failed policies to the price of drugs. The pricing system is run by the Medical Council of India, a notoriously corrupt body which India’s former Health Minister called “a snake pit of vested interests.”
South Korea’s draconian price controls on drugs are so complicated it takes 12-18 months just to get the government to agree on a price for a new drug.
Meanwhile, those who need the drug languish. A Department of Commerce study estimates that price controls in the aforementioned OECD countries have resulted in $5-8 billion each year in lost drug research and development.
As the siren song of price controls is sung once again in Congress, let’s not be seduced by its call and find more effective ways to let the free market work to assure that people have access to the drugs they need.
Larry Hart is the American Conservative Union Foundation Senior Fellow for Government Reform.
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