There Are High Costs From Implementing Drug Price Controls

There Are High Costs From Implementing Drug Price Controls

Once wide coercive powers are given to government agencies…such powers cannot be effectively controlled.

F.A. Hayek

As part of the chorus calling for drug price controls, the New York Times editorial page has claimed that “Americans will need to accept a trade-off that other advanced nations long since come around to: Slightly fewer new drugs will come to market, in exchange for better prices on the medications that already exist”.

There is not one part of this statement that is true. Worse, if the Times’ advice is followed, Americans will suffer dire consequences.

Let’s start with the state of the drug market in other nations. It is true that the prices of drugs are less in countries with price controls such as the U.K., Germany, Canada, and Japan. These lower prices come with a very high cost, however.

Countries that impose price controls suffer from critical access problems. Between 2011 and 2018, 88% of all newly launched medicines were available to patients in the U.S. In Germany, the country with the next highest availability rate, patients could only access 64% of the newly launched medicines. Canadian patients only had access to 46%, and Australians could only access 36%.

It is not simply a lack of access to drugs either; price controls often cause drug shortages even in the instances where the government has granted patients access to the drug. Drug shortages in Canada are so pervasive that the Canadian government has authorized a website dedicated toward “reporting drug shortages and discontinuations in Canada.”

Consequently, patients in Canada, the UK, and other countries with drug price controls are often unable to receive treatments with the latest drugs and biologics. Importantly, access to the cutting-edge medicines lead to better health outcomes.

Take cancer survival rates. New cancer therapies in the U.S. have contributed to a 27% decline in the cancer death rate since 1991. Further, the U.S. cancer survival rate for key cancers (e.g. the cancer survival rates for colon cancer, prostate cancer, and breast cancer) is the highest in the world.

As for the impact of price controls, as reported in The Lancet Oncology journal, the U.K. is at the bottom of international league tables for 5-year cancer survival rates for cancers including bowel, lung, stomach, pancreatic, and rectal.

These examples illustrate that patients pay large costs in terms of diminished health outcomes when governments impose price controls on medicines.

Another error made by the Times editorial is the presumption that because many other countries are imposing price controls on drugs that such a policy is something that the U.S. must “come around to”. As Milton Friedman noted in his 1971 testimony to the Joint Economic Committee, “one man and the truth constitutes a majority and fortunately, truth has never been decided by a counting of heads.”

In fact, the drug price controls that “other advanced nations have long come around to” are imposing unconscionable costs on themselves, as well as the U.S. Should the U.S. follow in their footsteps, we would only add to these costs.

As estimated in the baseline scenario of a 2009 study in the journal Health Affairs, drug price controls in the U.S. would reduce life expectancy in the U.S. and impose $8 trillion worth of costs on consumers over a 50-year period. U.S. price controls would also impose $5 trillion of costs on consumers in Europe. Alternatively, if Europe repealed its price controls instead of the U.S. imposing price controls, then the study found that Europeans would be $10 trillion wealthier, and people in the U.S. would be $6 trillion wealthier.

These results demonstrate that patients in the U.S., Canada, Europe, and Asia would all be better off if the governments of other advanced countries repealed drug price controls.

Instead of contemplating implementing a feckless policy, the question we should be asking is how can the U.S. encourage the other advanced countries to loosen their price controls and respect the intellectual property rights of U.S. firms? This is an issue that should be addressed through expanding international trade agreements.

Lastly, the Times editorial callously dismisses the importance of continued innovation. As I argued here, there are millions of patients and their families living with diseases that lack effective cures. Their hopes depend upon a vibrant biopharmaceutical industry, which on average invests nearly one-fifth of its gross revenues into R&D programs.

Price controls reduce the overall revenues for the biopharmaceutical industry, which will also reduce the total amount of money spent on new research and development. This reduction in revenues is why price control advocates acknowledge that these mandates will reduce the number of new innovative drugs that are developed.

However, the impact on innovation will likely be even more pronounced. Not only will there be fewer resources available for researching the next generation of cures, the greater difficulty firms will face covering the capital costs required to develop new medicines will reduce the incentive to develop new drugs as well.

Other countries’ experience with price controls should be a cautionary tale for the U.S. Their experience demonstrates that government agencies, by definition, lack the knowledge to centrally plan drug prices. Inevitably, government price controls harm patients and lead to lower quality health care systems.

Instead of these destructive policies, as I argued here, the federal government should address the problems with the pharmaceutical industry by promoting greater competition, increasing price transparency, and encouraging greater use of lower-cost biosimilars.

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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.