Polls conducted by Harvard University and the Kaiser Family Foundation continue to show that nearly three-fourths of the country remain seriously concerned about the rising costs of prescription drugs. And it is understandable why they’re worried: Prices of cancer-fighting drugs have risen tenfold since 2000, with some increasing by 506 percent to 1,000 percent! In 2017 alone, prescription drugs are expected to rise 12 percent, 6 times higher than the rate of inflation.
The problem here is very clear: How can public policy lower the price of prescription drugs? The answer, however, differs greatly depending on who you ask.
Some lawmakers and bureaucrats in Washington continue to float the idea of price ceilings, or caps, which set an arbitrary legal price on prescription drugs purchased through Medicare. This idea is often pitched as simply allowing the government to “negotiate” with drug companies, but this is window dressing for government-imposed price controls. Throughout history, similar efforts have disrupted the delicate equilibrium of supply and demand, causing shortages, black markets, and stunted innovation. These effects harm seniors dependent on these drugs much more than they would help them.
Further, it’s not even clear whether these types of policies would save taxpayers any money. In 2004, the Congressional Budget Office examined Medicare price negotiation and, in a letter to Sen. Ron Wyden, D-Ore., stated: “The extent of any savings would depend significantly on the details of legislative language; a proposal that applied to a broader range of drugs could generate no savings or even increase federal costs.”
In 2007, CBO again cast doubt over the supposed savings that could accrue from having the government dictate Medicare drug prices via negotiation: “Without the authority to establish a formulary or other tools to reduce drug prices, we believe that the Secretary would not obtain significant discounts from drug manufacturers across a broad range of drugs.”
To protect consumers and producers, a better path would be to reform regulatory procedures to speed up research, while keeping in place vital safeguards for consumers. The administration should also work with pharmaceutical companies to lower prices through non-binding agreements to bring relief to consumers.
History allows us to look back and see that price controls regularly produce negative consequences, but are still believed by some to be a saving grace.
To be perfectly clear, price controls in the United States have never worked. Just look at historical examples in different industries: gasoline shortages in the 1970s, rolling electrical blackouts in California in the early 2000’s, and fewer benefits for consumers because of debit card transaction fee caps.
No matter the industry, the outcome of price controls is always predictable: The seller and the buyer are always worse off. It is foolish to believe that price controls on prescription drugs would bring forth a different result.
While some observers enjoy demagoguing pharmaceutical companies for charging high prices, this narrative ignores the costs and risks associated with drug development. In fact, only about 30 percent of drugs actually produce a positive return on investment, which means that nearly 70 percent of drugs are unprofitable for pharmaceutical companies.
This is because the research and development process is incredibly costly with both time and capital. The entire process from discovery to market takes an average of 15 years. In addition to the long regulatory process, the cost to develop a drug has more than doubled in the last 10 years to $2.6 billion. These high development costs are driven higher by increasingly stringent Food and Drug Administration regulations, which reduce competition and ultimately lead to higher prices for consumers.
If price controls are imposed, it would be even less appealing for drug manufacturers to bring riskier drugs to market since prices will be below equilibrium. Investors will move resources like capital or researchers into other areas which will produce a greater return on investment.
Further, economists estimate that a 40 percent price ceiling on drugs will lead to a 30-60 percent reduction in R&D for new drugs. Profits motivate companies to reinvest those earnings back into other areas of R&D for new life-saving medications. More drugs mean a greater opportunity to make money and provide desperate patients with access to medicine. Less money means less discovery, innovation, and fewer new drugs for consumption for those in need.
The way to lower drug prices is not through government-mandated pricing, the antithesis of a free-market society. Removal of unnecessary regulatory hurdles with the FDA, and non-binding pricing agreements, would result in a better outcome for both consumers and producers.
If you think the price of healthcare and drugs are expensive now, just wait until you see the results if liberals ever get the chance to implement a “free” single-payer system. Democrats and Republicans agree costs are unreasonably high and need to be lowered, but the solution here is not more government mandates through price controls.
President Trump can use his office and bully pulpit to put social pressure on these companies to reduce FDA regulations, speed up the approval process, save companies millions, resulting in lower prices for consumers. On the other hand, price controls in the form of “negotiation” would cause shortages of vital drugs, reduce innovation and yield minimal, if any, savings to the government.
Brandon Arnold (@BrandonNTU) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is the executive vice president at the National Taxpayers Union.
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