The Price Control Hammer Will Break the Health Care System
From California to Washington D.C. legislators continue to confirm Abraham Kaplan’s famous insight that if you, “give a small boy a hammer, he will find that everything he encounters needs pounding.” In the case of our legislators, that hammer is price controls; and, what needs pounding is the price of drugs.
If implemented, price controls will worsen our health care system’s underlying problems.
To start, price controls are irrelevant for most patients. Nearly 90 percent of all drugs dispensed are generic medicines. Not only are generics significantly cheaper in the U.S., the prevalence of cheap generics helps explain why total pharmaceutical spending as a percentage of total health care spending is lower in the U.S. (12.2 percent) compared to the average OECD country (16.9 percent).
Price controls will harm patients who benefit from patented medicines, however. To see why, imagine the consequences if the government capped the salary of doctors at the U.S. median income level. Surely many doctors would cease practicing, causing a doctor shortage to arise. Over time, this doctor shortage would worsen as more young people would be discouraged from entering the field. Ultimately, the quality of health care would decline, and total costs would increase as untreated minor afflictions would become more expensive ailments.
This same logic holds for the pharmaceutical market. With price controls, many innovators would conclude that the long, risky, and expensive ($2.6 billion per successful drug) R&D process would not be worth it. The amount of pharmaceutical innovation, which has been essential to improving the quality of health care delivered in the U.S., would decline.
Price control advocates also misunderstand the complex drug pricing process. As I argued previously, Pharmacy Benefit Managers (PBMs) create many distortions. Perhaps most importantly, PBMs are driving list prices for drugs ever higher (9.2 percent in 2016) even though the actual transaction prices are growing more moderately (3.5 percent in 2016). Price control advocates erroneously focus on the invoice price trends misunderstanding the market’s dynamics.
Ill-advised policies rarely lead to good outcomes. Instead of imposing the seemingly convenient policy of price controls, legislators should focus on the hard work of systemic health care reforms that empower patients and encourage a more innovative health care sector.
Wayne Winegarden, Ph.D. is a Sr. Fellow in Business and Economics at the Pacific Research Institute. This Blog is based on a longer editorial, which can be found here.