In his last State of the Union address, President Trump declared that America will never be a socialist country. Yet, in this year’s State of the Union, President Trump is expected to announce that his administration is moving forward on a plan to fix prices of prescription drugs based on price controls found in other countries, many with socialized medical systems such as the United Kingdom.
The administration’s plan, called the International Pricing Index (IPI), is more than just an unforced political error ahead of an election where the debate over the government’s involvement in health care is expected to take center stage. Based on initial details of the draft plan published last year, the IPI would be a major error in both economic and legal terms.
Washington’s inability to prevent health care costs from spiraling out of control does not mean that health care is somehow immune to the laws of economics. Far from it. The reason that health care in the United States is notoriously expensive is because of the extensive involvement of the government in the first place. Government directly subsidizes certain forms of health insurance, directly pays for the health care of huge portions of the population, and significantly restricts health care supply at the local and federal level through mechanisms like certificate-of-need laws and onerous approval processes at the Food and Drug Administration (FDA). Simply put, wherever the government gets involved to make health care better and more affordable, it tends to have the opposite effect. For example, recent research by the Cato Institute shows that following the implementation of the Affordable Care Act (better known as Obamacare) and its mandate for contraceptive coverage, prices for contraceptives skyrocketed.
The problem with health care prices is simply not a product of a lack of government, but rather a vicious cycle where the unintended consequences of government meddling beget more government meddling. President Trump would be wise to reverse this trend. However, the IPI represents foolhardy government meddling in its purest form, regardless of the sector of the economy: price controls.
Price controls ignore the function of prices to begin with. Prices are nothing more than information signals about supply and demand in a given market. When these signals are tampered with, bad information is transmitted to actors in the marketplace and thus bad outcomes are produced. In the case of a price ceiling like the IPI, the signals tell consumers there is more of something than there actually is and tell producers to produce less of it. This creates a shortage. In the case of a highly-innovative field like prescription drugs, lack of existing medicine and other treatments are only one form of the resulting shortages. The other shortage comes in the form of reduced investment in discovering new treatments.
All of this is not just economic theory. The data overwhelmingly show that the United States, absent of price controls, leads the world in both access and innovation in new treatments. Without a doubt there is a problem with the rest of the world free-riding off of investments paid for by American patients. That being said, the rest of the world pays a price for this with a significant lack of access to new treatments. Yet, to whatever extent the rest of the world is unfairly benefitting from American pharmaceutical research and development, the answer cannot simply be to free ride atop a free rider, such as the IPI proposes. Such a scenarios leaves no one pulling medical innovation forward.
In addition to the economic problems with IPI, there are serious legal concerns for the Trump administration to consider before finalizing such a program. First, the IPI is undoubtedly beyond the size and scope intended by its authorizing statute. The IPI would be a program of the Center of Medicare and Medicaid Innovation or CMMI. CMMI was authorized by Congress to conduct limited and targeted experiments with Medicare to figure out ways to lower costs. Yet officials at the Department of Health and Human Services (HHS), the agency overseeing CMMI, have openly bragged about the spillover effects of a potential IPI outside of its experimental group, which itself would be a staggering 50 percent of the Medicare population, and into not just the rest of Medicare but the entire American health care market. Congress surely did not intend for experimental programs to create unilateral backdoors to price controls throughout the health care sector, especially when considering the fact that Congress has explicitly banned the use of Medicare as a bludgeon against drug companies to lower their prices.
Additionally problematic for the Trump administration is the law by which Congress created CMMI and under which the IPI would derive its authority: Obamacare. Yes, the Trump administration is set to propose a sweeping overhaul of pricing in the pharmaceutical market via a law it is currently fighting to repeal, root and branch, in federal court (See: Texas v. United States).
In sum, the Trump administration needs to choose a path on health care as it is presently trying to have its cake and eat it too. The correct path is the one the administration is pursuing in Texas v. United States, an effort to unwind the remaining provisions of Obamacare from a health care sector that will still be overregulated in its absence. If the American people are interested in the other path, the one of government meddling that flies in the face of both the laws of economics and the law itself, then they will make their voices heard soon enough in November. President Trump ought to at least give them the option by abandoning the proposed IPI.