The populist mob is rounding up the pitchforks to go after the pharmaceutical drug industry. But as with almost every other issue, they should really be looking at backing the government out of the market instead of adding more layers of expensive regulations and taxes that only serve to shorten life expectancy.
The problem is that if you ask people about prescription drugs, a question of price is almost certainly right around the corner. People feel that prescription drug prices are too high. But are they too high — or just high? Are all of the prices high? Or is it just the prices for the newest drugs? And most importantly, why is the price of a drug what it is?
As populist agendas have gained steam, politicians have started focusing more and more on areas where voters complain — and instead of finding policies that address the root cause (normally big government), they have started proposing band-aid approaches that use more government instead of less.
It is the easy way out — and a sure way into failure.
Over the next decade, life expectancy is projected to increase by 16 months largely due to drug innovations. New drugs are coming out all the time, and they are seemingly becoming more and more revolutionary every year.
This isn’t just due to luck. Drug companies spend 15%-20% of their revenue on research and development. The Council of Economic Advisers, President Trump’s economists, published a paper in December that decimated House Speaker Nancy Pelosi’s HR 3 (which would impose a 95% tax on some drugs) stating that if signed into law, her bill would lead to hundreds of fewer drugs on the market and would take four months off of the projected life-expectancy gains over the next decade.
Sure, a few people would possibly get access to lower-priced drugs now, but at a cost to society that means lives. It wasn’t just Trump’s economists — the Congressional Budget Office came to the same conclusions.
This is just math, not smoke and mirrors. Pelosi’s bill would cost pharmaceutical companies $500 billion to $1 trillion dollars. That means that anywhere from $75 billion to $200 billion less would be spent on drug research and development. With the cost of developing a new drug averaging about $2 billion, the cost to the innovation is an easy conclusion. However, that doesn’t fit the static talking point of “drug companies are bad.”
Unfortunately, it isn’t just Nancy Pelosi and HR 3. Trump’s administration is also proposing an “International Pricing Index” that would import prices from other countries. The countries on the list don’t respect intellectual property the way we do in the United States and therefore don’t have a robust research and development market themselves. They don’t get the newest drugs because of their pricing schemes either. Similar to Nancy Pelosi’s HR 3, Trump’s proposal would also cost the pharmaceutical industry billions of dollars, which would also come at the cost of fewer new drugs.
The problem is that the president has a good track record of saying that he is going to do something and then doing it, and Pelosi has a pretty easy job of passing whatever she wants out of the House — her party has the majority, and they get to make up the rules of debate. So with both of them attacking the drug industry and only the Senate as a possible chamber of reason, the drug industry is understandably uneasy.
However, everyone should be wary of these attacks. We don’t know when one of these new drugs is going to be the drug that one of our loved ones needs.
Populist healthcare policies are good if you are healthy. Healthy people don’t need cutting-edge drugs. However, politicians get away with their pithy statements because populist talking points are short quips designed to appease the base.
But the markets that these talking points are aimed at and the policies that are produced and supported because of them are ever-changing animals that adjust, change, and adapt to the market they are confronted with. Populist politicians seem to forget that instead of markets obediently following the dictates of their all-powerful quip, entrepreneurs merely adjust to any result of the quips — the market momentum is something that a mere bill in Congress isn’t going to change.
That means that these policies don’t just cost pharmaceutical companies a few billion. They cost society a few new drugs — and they send a chill through the whole of the innovation economy. If a company isn’t allowed to make a profit from research and development, they are likely to do less of it. The government should be finding ways to create more innovation instead of taking a baseball bat to the innovation that we do have.
Charles Sauer (@CharlesSauer) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is president of the Market Institute and previously worked on Capitol Hill, for a governor, and for an academic think tank.
