The Foolishness of Prescription-Drug Price Controls

Asia's Tech News Daily

Here is a fact that you will seldom hear cited in Congress: Prescription-drug prices have been declining — for years — even as consumer prices elsewhere in the economy have been rising sharply.

The Foolishness of Prescription-Drug Price Controls
© Graeme Jennings/Pool via Reuters Sen. Bernie Sanders, (D., Vt.) questions former Michigan Governor Jennifer Granholm during a hearing to examine her nomination to be Secretary of Energy on Capitol Hill, January 27, 2021.

Prescription-drug prices declined by more than 3 percent between April of 2019 and April of 2021. For comparison, gasoline prices are up 50 percent in the past year.

But never mind the facts: Emerging from his lakeside dacha to thunder with denunciations of “greed” and “corruption,” Senator Bernie Sanders, the Vermont socialist who dominates the Democratic Party in spite of his not being a member of it, is making an eleventh-hour press for pharmaceutical price controls.

This is a fundamentally stupid idea but an old and popular one, embraced not only by left-wing populists such as Senator Sanders but also by right-wing populists such as Donald Trump, whose rhetoric was indistinguishable from that of the creaky old socialist when he declared that “drug companies are getting away with murder” and that the only proper response was federal price controls. President Trump was at least less coy: He called for federal action that would see Washington “setting prices,” while most supporters of the proposal pretend that it is a matter of “negotiating” them.

Of course, drug prices already are negotiated — that is what markets do. If sellers had the ability to unilaterally set prices with no input from buyers, a Big Mac would cost $50 and a Ford pickup would cost $100,000. Consumers — both end-users and intermediaries such as insurance companies — get a say, too. They can use the magic word: “No.”

True, some medical expenses are life-and-death matters in which patients will pay any price to get what they need, but most are not. It also is true that our markets are distorted by too much reliance on “third-party payers,” which dampens consumers’ price-sensitivity. Unsurprisingly, we have seen the most effective negotiation of drug prices in those situations in which consumers are paying out-of-pocket and thus encouraged to pay careful attention to prices. This sometimes produces weird results — name-brand Viagra still costs about 40 times the price of its generic equivalent — but it also produces good results overall. And that is why — in spite of the rhetoric we must endure from Senator Sanders et al. — prescription drug prices have been in fact declining in recent years, according to BLS data. That decline is even more remarkable in the context of so much inflation elsewhere in consumer prices.

Senator Sanders proposes to “fix” a problem that already is well on its way to being solved organically.

Hysterical critics charge that Democratic skeptics such as Senator Kyrsten Sinema must somehow have been corrupted by the pharmaceutical interests, but our actual national experience with price controls is enough to awaken the suspicion of responsible Democrats as well as Republicans. We know from long and unhappy experience that price controls do not produce low prices — price controls produce shortages and rationing. We have seen this in Venezuela under socialism, we have seen this in the United Kingdom in the pre-Thatcher era, and we see this in American cities where rent-control laws have produced housing shortages for buyers and renters with low-to-moderate incomes. Some Americans — at least, those as old as Senator Sanders — should also remember the failure of wage and price controls under Richard Nixon. The underlying economic mechanism is easy enough to understand: With a few exceptions, price controls are designed to force sellers to sell at below-market prices, and sellers respond by abandoning those unprofitable (or less-profitable) products and producing more profitable products instead. That is precisely what pharmaceutical companies have been warning of in the matter of federal price “negotiation” — rather than lose money selling drugs at artificially discounted prices, they will stop selling those drugs altogether and focus their businesses on more profitable products.

But that is only one possible way for these “negotiations” to go wrong. The same people who complain about the pharmaceutical industry throwing its money around to lobby against price-negotiations never seem to appreciate that if Plan A fails, then Plan B is to use that money and lobbying power to work to dominate the price-negotiation process and tilt it in its own favor. We have seen that dynamic at work in plenty of other contexts, which is why multi-billion-dollar agribusiness concerns and favored manufacturers enjoy various federal subsidies and price protections. Federal price supports and regulation are why you already are overpaying for milk and sugar and for everything that contains milk or sugar.

This is, at heart, a philosophical problem.

While it is true that “socialist” too often gets thrown around as a vague term of abuse, to understand the congressional fight over prescription-drug pricing it is necessary to understanding that the chairman of the Senate budget committee, Bernie Sanders of Vermont, is a professing socialist. We understand that the Democrats had to do something with Senator Sanders, but putting a socialist in charge of the budget committee was always a terrible idea — the Special Committee on Aging would have been a better fit for Senator Sanders, who not only is old enough to remember the old Soviet Union but is old enough to have honeymooned there. Senator Sanders is a radical who remembers when a red state was a red state.

Senator Sanders believes that imposing a command-and-control model on pharmaceuticals will magically take scarcity out of the picture, when all of the historical evidence argues that it will only make scarcity much more acute. Command-and-control policies do not solve economic problems — they replace one set of problems with a new and generally worse set of problems, replacing many economic actors and decisionmakers with a single powerful decisionmaker. The closest things we have to socialized medicine in the United States are Medicaid, which is a disaster, and the veterans’ health-care system, which is a national disgrace.

If central planning were the way to achieve abundance and affordability, Venezuelans wouldn’t have been reducing to butchering zoo animals for food.

There are things we can do to make prescription drugs and other health-care products and services more affordable. The process for getting new drugs approved is too long, too expensive, and too cumbrous — and the lightspeed deployment of COVID-19 vaccines shows that we can move more quickly while moving safely. And while U.S. patent law has been a boon to pharmaceutical innovation, there is some room for improvement there, too, particularly with regard to “evergreening,” the strategy of using superficial changes to pharmaceuticals to extend patent protection and keep generic competitors out of the marketplace. Unfortunately, the most important and most effective strategy is also one of the least popular: shifting medical costs away from third-party payers onto consumers themselves, thereby enabling the emergence of an ordinary, price-sensitive consumer market for most medical goods and services.

The market for health care, like every other market, is a delicate ecosystem. Senator Sanders proposes to throw Molotov cocktails into it. As it stands, we have an abundance of prescription drugs at prices that have been modestly declining. We can build on that, letting markets and innovation do their work while providing financial support where needed and careful regulation where warranted.

Or we could try putting some shiftless socialist dingbat who has never held down a real job in charge of our health care and see how that works out.

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