With Drug Pricing, Bipartisanship Isn’t an Excuse to Violate the Laws of Economics
In an age of intense political polarization, some may assume anything that House Speaker Nancy Pelosi and President Donald Trump even marginally agree on has to be a good thing. But when it comes to the issue of prescription drug prices, this is a dangerous temptation. No amount of good will or aisle-spanning agreement can compensate for fatal flaws underlying their markedly similar approaches.
Of course there are key differences to what President Trump’s Department of Health and Human Services (HHS) and Speaker Pelosi have proposed on drug pricing, but at their core they propose to make the same fundamental change to U.S. healthcare policy. Both proposals would have the federal government use Medicare as a bludgeon to set or influence U.S. drug prices based on prices found under nationalized healthcare systems and explicit price controls overseas.
This sounds like an easy and obvious fix. If other countries are able to set lower prices, why can’t the U.S.? There’s a great line from the children’s book The Phantom Tollbooth that perfectly applies to this kind of thinking in public policy: “The only thing you can do easily is be wrong, and that’s hardly worth the effort.”
While it is true that the price for certain common prescription drugs are often lower abroad than they are here in the U.S., just because the cost cannot be found in the price does not mean it ceases to exist. All of the various problems even a bad economist could tell you about price ceilings can be found in overseas drug markets. Shortages manifest themselves in a few ways.
Beyond a conventional shortage, where there simply isn’t enough supply of an existing drug because artificially low prices have increased consumption but reduced the incentive to continue producing, shortages also exist in terms of the variety of drugs available and investment in creating new drugs. Of the 290 new active substances on the market between 2011 and 2018, 89 percent were available in the U.S. The next highest availability rate in a country under either the Trump or Pelosi proposal was Germany at a mere 62 percent. Pharmaceutical investment and innovation in the U.S. dramatically outpaces the rest of the world in all categories. The U.S. leads in total investment, investment growth, and drug discoveries. The U.S. even outpaces the combined economy of the European Union in all of these areas.
While Americans may face higher prices for prescription drugs, the rest of the world faces grim costs, such as the lack of new, lifesaving treatments. Further, the price of new drugs only available in the U.S. may seem exorbitant in some cases, but these drugs can save many times their total cost if they avert costly long-term treatments and surgeries. What’s the real cost of a $1,000 pill that prevents a $10,000 surgery?
For drugs that are available both here and abroad, it is true that Americans get stuck subsidizing the cost for foreign patients. This free-rider problem cannot be denied. The problem is that both the Trump and Pelosi proposals suggest free-riding on top of this free-rider problem. This begs the question as to who will be left pulling medical progress forward.
Without question, something needs to be done about the cost of prescription drugs and healthcare in general in the U.S. However, addressing the cost of anything by tinkering with prices ignores the function of prices entirely. Prices are signals influenced by countless inputs. They are the lights and dials on the dashboard of the economy. Simply switching the check engine light off doesn’t mean you’ve solved the problem. In fact, like ignoring a check engine light, manipulating prices without getting at the underlying issues will likely cause more damage down the road.
Bipartisanship may be sufficient for changing the laws of the country, but warm feelings can’t change the laws of supply and demand. Any bipartisan deal to set drug price controls is no less of a political stunt as any of the uglier parts of Washington these days.
Originally published at Real Clear Markets.