Price Controls are not the Answer to Rising Prescription Drug Costs
November 2001
The state legislature will soon be in session again and one of the major issues on its agenda will be how sensibly to address the rising cost of prescription drugs. Some lawmakers are calling for price controls, heavier regulation and, in some cases, a take-over of the pharmaceutical industry as part of a state-run single-payer system. There is a real danger that increased government controls could smother the bold innovation that makes new drug treatments possible.
The stakes are high. With widespread apprehension over anthrax and other potentially deadly biological terrorist attacks, America's pharmaceutical industry is more important to preserving our health than ever before. Effective treatments like Cipro and doxycycline require years and millions of dollars to develop. Developing any new idea takes risk, enterprise and investment.
The pharmaceutical industry in our state would be heavily impacted by increased regulation. A $900 million industry, drug-making companies provide some 2,950 jobs in Washington, while suppliers and distributors contribute another 34,000 jobs. The industry annually pays more than $149 million in taxes to state and local coffers.
Price controls and heavy regulation would stifle the industry and make the problem of drug availability, and the general economy, worse. Policymakers risk causing the industry to stagnate, as future medical research and distribution activities migrate to other parts of the country.
One attempt to impose price controls on prescription drugs has already failed. Last year Governor Gary Locke by executive order created the AWARDS program. The plan required the state's benefits manager to negotiate discounts with drug manufacturers. If patients ordered the same drugs through local drug stores, pharmacists were required to provide the discounted price, even though pharmacists had to absorb the cost themselves.
In May, Judge Richard Strophy ruled the program illegal, saying the state did not have the authority to force neighborhood pharmacists to offer their products at the discounted price. Policymakers are often tempted to provide a popular benefit while shifting the cost to a few private citizens - it is always easy to be generous with other people's money - but this approach is shortsighted because price controls never work.
From the days of ancient kings to Richard Nixon's "Whip Inflation Now" initiative, political leaders have tried to use price controls to make popular products cheaper at the expense of producers. But the law of supply and demand is not so easily repealed. Artificially capping the price of a commodity creates a number of harmful effects. Price controls on drugs would:
There is a better way. A new study just published by Washington Policy Center and written by nationally-recognized health care expert Dr. Merrill Matthews examines how the benefits of competition and reduced regulation can help reign in prescription drug costs. Titled "Prices, Profits and Prescriptions: The Pharmatech Industry in the New Economy," the study looks at why some drugs are expensive while others are not, and reviews the growth of research and development costs in the pharmaceutical industry.
As the study shows, there are practical ways to ease prescription drug costs while preserving innovation and availability, without turning to counterproductive price controls.