Price Controls
Are Wrong Prescription for Underinsured Who Need Costly
Drugs
St. Paul Pioneer Press
August 16,
2000
By D.J. Tice
No one can deny
that America's pharmaceutical industry is the most creative in the
world. Nobody disagrees that this high technology powerhouse is a
triumphant exporter in an era when Americans fret about trade deficits.
Most important, there is no dispute that American drug
firms are introducing increasingly wondrous, life-saving and
life-enhancing products at an ever quickening pace -- products so
invaluable that whenever sick people are unable to obtain them, it is
considered the stuff of tragedy or even injustice.
From
anti-depressants to AIDS therapies to blood-clot busters to promising
Alzheimer's medications to, yes, Viagra and a great deal more, American
drug companies are making uncanny breakthroughs that result in longer,
better lives.
It should be surprising, but somehow it
isn't, that this industry is under widespread attack. Tireless
laboratory research has yet to produce an antidote for wishful economic
thinking -- which turns epidemic in an election year.
There are some malfunctions in the pharmaceutical
marketplace. But there is no economic malady in the world that can't be
made worse with price controls. That's a prescription being suggested,
in various forms and doses, by liberal politicians far and wide.
Price controls would ``solve'' the problem of high-priced
breakthrough drugs mainly by undermining the economic incentives to
search for new drugs. The price Americans would pay then would come in
the form of life-saving drugs that wouldn't get invented, at least not
as soon as they might have been.
According to reports from
the Congressional Budget Office and the U.S. General Accounting Office,
neither drug price inflation nor drug company profits are as
outlandishly high as they often are made out to be.
Instead, the trouble we face is this: Sick Americans who
lack prescription drug insurance -- often the elderly -- are trapped in
a marketplace where almost everyone else has found a way to control drug
costs.
American health insurers control costs by using
their ability to buy in volume to negotiate discounts with drug
manufacturers. Foreign countries (and, to some degree, several U.S.
government programs) do it with price controls. The uninsured end up
paying more than their share to cover the huge research and development
costs of bringing new drugs to market.
Private insurance
coverage for prescription drugs has expanded in recent years, precisely
because improved drugs are increasingly effective as alternatives to
costlier and more traumatic therapies such as surgery. Medicare, the
federal health insurance program for the elderly, hasn't kept pace with
the times. Medicare offers no drug benefit, and many supplemental
insurance policies for the aged are inadequate.
It makes
sense to consider adding prescription drug coverage to Medicare. But it
will be costly, and merely funding existing Medicare benefits in the
years ahead, as the retiree population soars, remains a considerable
task.
Faced with such formidable, though solvable, policy
challenges, politicians are succumbing to the temptation to demonize
corporate America and promise something for nothing. They suggest the
nation can simply command lower drug prices without losing anything.
One reason this looks possible is that many foreign
countries seem to be getting away with it. Canada and many European
nations impose price controls on drugs, and American companies sell
drugs there at prices far lower than the same drugs fetch in the United
States.
This is frustrating and confusing, but it doesn't
mean price controls would work for America. It means foreign countries
are catching a free ride on the American free market and the
world-leading innovation it fosters. They are letting Americans cover
most drug research costs.
But if price controls destroy
incentives, why do American firms still sell in other countries at low
prices? It's because producing a drug is cheap once it's developed.
Every sale at a price above the actual cost of manufacturing the pills
is better than nothing.
It's the same reason airlines sell
seats to leisure and stand-by travelers at dramatic discounts. The plane
is flying anyway; better to fill seats at almost any price than leave
them empty.
But drug firms can develop new drugs only if
they can recoup, somewhere, their underlying costs. They spend hundreds
of millions of dollars discovering each successful new drug, each of
which must cover the costs of thousands of failed experiments. They
spend years proving the safety of new drugs to the government. They lose
years off the patents on their discoveries while going through that
approval process.
If America joins the price control
parade (by allowing the ``reimportation'' of price-controlled drugs from
overseas or by any other means), the result will be to discourage
investment in the discovery of new drugs. How severe that effect would
be, and which patient groups would bear the brunt of reduced research,
we can't be sure.
There are other remedies for the
problems of the uninsured. Price controls would be a risky scheme if
ever there was one.