Price Controls Are Never The Answer

Senator Rick Scott (R-FL) has just doubled down on one of the Trump Administration’s unsound ideas. His proposal is disappointing for many reasons, particularly because Alex Azar, Secretary of Health and Human Services, has proposed an alternative reform that, if Congress implemented, would meaningfully improve the affordability of prescription drugs for patients.

As part of the “Transparent Drug Pricing Act of 2019”, Senator Scott proposes to set the list price of all medicines to the lowest retail list price among five countries – Canada, France, the United Kingdom, Japan, and Germany.  This terrible idea is supported by Senator Bernie Sanders (I-VT) and Ro Khanna (D-CA) whose ultimate goal is a single payer or Medicare for All plan.

Linking U.S. pharmaceutical prices to the prices in other countries – whether it is an index of 14 countries as the Trump Administration suggested or the lowest price of five countries as Senator Scott suggests – is a backhanded way of imposing price controls in the U.S. The only difference being the government would offshore the price controls to other countries instead of setting these prices itself.

When politicians claim that price controls will decrease the prices of medicines, of course, the proposal sounds great, it appears as though patients can get something for nothing. But, as the old Japanese proverb goes, “there is nothing more expensive than something free”.

As I have discussed here, implementing pharmaceutical price controls will lead to reduced patient access to cutting edge medicines. Price controls will also diminish the incentive to innovate, denying patients of the benefits that the next generation of medicines could create.

Adding insult to injury, despite the burden they impose, prescription price controls will not address the problems afflicting the health care industry. Consider that national health expenditures grew 3.9% in 2017, but prescription drug spending grew only 0.4%. Plus, at $333 billion, prescription drugs spending accounts for around 10% of the $3.5 trillion in total national health care expenditures. Drug spending is simply too small and growing too slowly to be driving the overall unaffordability problem that plagues the U.S. health care system.

The damage created by the government-imposed price controls would not be contained to the pharmaceutical market, either. Due to the reduced access to prescription drugs, the use of other, often more expensive, health care services will increase. Accounting for these dynamic impacts it is likely that price caps applied just to the prescription drug market will actually increase overall health care spending.

Advocates for single payer will inevitably use the failure of partial price controls to claim that the only way to control spending is to embrace single-payer reforms, meaning that all private insurance would be banned and that price controls would be imposed across the entire health care sector. And, recent polls from the Kaiser Family Foundation (KFF) would seem to support their claims. According to the January 2019 poll, 56% of Americans support “having a national health plan, sometimes called Medicare for All, in which all Americans would get their insurance from a single government plan.”

Such support would seem to indicate that a majority of Americans now supports a single-payer health care system. Except, this question is akin to asking the patrons of a sports bar if they would like free beer. Without accounting for the costs that a single-payer health care system creates, people’s support for the concept is misleading.

Recognizing this, the KFF poll followed up by asking if people still supported single-payer systems once the costs that these systems inevitably impose are recognized. These costs include treatment delays, higher taxes, and the elimination of private insurance. And, instead of being widely supported, support for Medicare-for-all declines to as low as 26%. In other words, Americans no longer support Medicare-for-all, nor the price controls inherent in a single payer system, once the costs of the policy are considered.

Instead of supporting feel-good policies that will fail to implement the needed reforms and be very costly in terms of one’s health, Senator Scott would better serve patients by following Health and Human Services Secretary Azar’s lead and reform the current drug rebate system.

The flat expenditure growth for pharmaceuticals is evidence that net pharmaceutical prices are not increasing at excessive levels. Patients are not benefitting, however, due to the complex and opaque pricing system. Secretary Azar has proposed a fix that would ensure that patients, not the middlemen called Pharmaceutical Benefit Managers or PBMs, benefit from the discounts that are controlling overall expenditures on prescription drugs.

Without Congressional action, Secretary Azar’s plan will only benefit Medicare and part of Medicaid. Congressional action can ensure that patients with commercial insurance plans (the majority of patients) can also benefit.

Embracing solutions that fix the defects in the current health care market is the best way to improve the affordability of prescription drugs while also ensuring access and innovation. The “Transparent Drug Pricing Act of 2019” fails this test. It is simply a big government proposal that will encourage greater government interference in the health care markets to the detriment of patients.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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