Price Controls are Not the Answer to Rising Prescription Drug Costs
2001-22
Given the 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.
For that reason it is all the more worrisome that some policymakers in Washington state 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. Increased government controls could smother the bold innovation that makes new drug treatments possible.
The stakes are high. Our state is one of the fastest-growing centers of medical research in the world. Biotechnology and medical technology in Washington comprise almost 170 companies employing nearly 16,000 people. Washington companies such as Immunex and Cell Therapeutics invest hundreds of millions of dollars in search of treatments for painful afflictions like arthritis and leukemia.
The pharmaceutical industry itself would be most heavily impacted by increased regulation. A $896 million industry in 1998, 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 $149.5 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 at imposing 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 local 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 would:
Myth: price controls are justified because they are an "essential of life"
Despite these harmful impacts, some still argue that price controls are justified because medicines are an "essential of life." This claim is false on two counts.
First, the realities of the economy make no distinction between products deemed "essentials of life" and other products. The damaging impact of price controls on both is the same. In fact, the more essential a product is to basic human needs, the more urgent it is not to impose controls on it.
Second, the "essentials of life" argument overlooks the even more fundamental needs of life that are amply provided through vigorous competition in the free market. Food, clothing and housing are immediate human needs. For the vast majority of citizens these needs are met through a vibrant system of private buying and selling, with the government's role limited to protecting public safety and assisting the needy. Daily experience shows that when the market is free to operate under minimal government oversight, the result is abundance, quality service and low price.
A study just published by the Washington Policy Center and written by nationally recognized health care policy 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, reviews the growth of research and development costs in the pharmaceutical industry, and examines the level of drug company profits in relation to other major industries.
Policymakers will find this study to be a valuable guide in considering ways to make health care more accessible while preserving innovation and availability. Citizens will find it useful in learning about practical ways to reform our health care system without turning to price controls and increased regulation.