Five years from now, when the overall price of medicines is skyrocketing, look back on this month and blame the Democrats for ruining the generic drug industry.
Better yet, America should raise Hades this week by calling Democratic House members to urge them to vote against the provision in the Manchin-Schumer tax-and-spend bill that sets up a spurious government “negotiation” of Medicare drug prices. The Medicare provision is horribly counterproductive on numerous levels. What it will do to deter the development of inexpensive generic drugs will put a particular crimp on family budgets.
To understand how and why the provision would gum things up takes only a simple understanding of how free markets work. In almost any industry, costs for research and development mean that prices for groundbreaking new products must be high, because otherwise, there would be no way to recoup the initial investment outlays. Nevertheless, after patents have expired, or if a competitor can develop a similar product without violating the patent, the early competitors can make money by just slightly undercutting the high prices of the original. Even then, the initial investment costs for the competitor can be high as well.
Eventually, though, the market grows for the new product as its efficacy becomes obvious. As the market grows, more producers can enter the field, charging even lower prices because they can make up for low per-unit margins with a higher volume of sales. Think of how prices for computers, and then smartphones, actually fell for years. Even though the demand was greater, the number of suppliers became greater as well. There was competition for market share to provide products that were ever-more-efficient at the lowest price possible.
This is all especially true with the development of life-saving drugs. The cost of research, government-mandated testing, and development for individual drugs can run into the hundreds of millions of dollars or even more. If government, effectively at the point of a gun, can “negotiate” or mandate lower prices for key drugs through Medicare (which is what the Manchin-Schumer bill would require), then not only will the initial pharmaceutical company not be able to recoup its investment, but the whole market will be thrown off.
As noted above, even the first “generic” competitor often has initial investment costs that make it worthwhile to join the fray only if it can charge a price nearly as high as that of the original drug it wants to compete with. When government squeezes the originator, it also squeezes the possible margins for potential competitors and so on down the line. The end result will be that fewer (if any) competitors will enter the field at all, preserving effective monopolies or near-monopolies for original brand-name drugmakers for a far longer time period — in some cases, perhaps forever.
What do you get with a virtual monopoly for a prescription drug without generic competitors? Higher prices for everyone — and that is if new drugs are developed at all. The same price controls that damage the generic drug industry will also provide disincentives for companies to do high-cost research in the first place.
“I would be shocked if the impact of this bill doesn’t result in 15 fewer medicines from Eli Lilly and Company alone,” said Eli Lilly CEO David Ricks.
The Manchin-Schumer bill would not only cause higher prices for generic drugs, but it will impose a higher cost in the form of human suffering by patients who won’t be treated by drugs that never get developed at all. It is abominable.
