Government rules may be cause of drug price headache, not cure
One of my family members, who has multiple sclerosis, takes two prescriptions to treat the illness.
Together, the medications cost $130,000 a year.
Thankfully, her family’s insurance and the MS LifeLines charity cover the majority of the cost. If not for the charity and her insurance, the medication would simply cost too much.
And one of those medications, Rebif, is over three times more expensive in the United States than in other countries.
A lot of people, including President Joe Biden, blame “corporate greed” for such high prescription costs. But it’s not that simple.
In his State of the Union address earlier this month, Biden said that expanding price controls to cover all Americans, and not just Medicare recipients, is the solution to lower pharmaceutical prices.
But more government intervention into the free market isn’t the answer. In fact, one of the big reasons why drug prices are so high now is because the federal government protects the pharmaceutical industry from competition abroad.
FDA regulations help raise costs
Just as tariffs make U.S. products more expensive, the Food and Drug Administration makes prescriptions more expensive by prohibiting Americans from buying cheaper medication from other countries.
The FDA’s slow and complex approval process for generic drugs also makes drug prices higher than necessary. The approval process for a generic drug can take years. That’s one reason why more than 500 brand drugs don’t have any competition.
But the biggest reason why drug prices are high is the 1984 Hatch-Waxman Act, which allows drugmakers to maintain a monopoly on new products until their patent expires.
Patents provide an important protection against intellectual property theft and help to encourage investments in research and development. But drugmakers have learned to extend patent protections, and their monopoly control of a medicine, by tweaking their products in trivial ways – like changing the pill coating – and applying for another patent.
This process is called “evergreening.” According to the Center for Innovation’s public database, “Johnson & Johnson’s Janssen Global HIV drug Prezista ranked second in number of protections, receiving 167 protections from 14 unique patents to delay competitor entry for 16 years.”
The center’s public database, at University of California College of the Law, San Francisco, shows that “Gilead’s HIV drug Truvada ranked fourth in the top 20 with 120 protections (extending for more than 17 years), and its HIV drug Viread came in fifth with 118 protections (extending for more than 16 years).”
Medicare and Medicaid also share blame for the high prices. Medicare buys prescriptions based on the average private price, and Medicaid buys prescriptions based on the lowest price negotiated by a private insurer. Those rules give pharmaceutical companies an incentive to keep drug prices higher than necessary.
So why not, as Biden has suggested, simply dictate how much companies can charge for medications?
Price controls have many unintended consequences. Prices are signals in the market that balance supply and demand. When the government chooses a price below what the free market would set, supply decreases and demand increases. In other words, producers lose their profit motive so production is discouraged, and consumers are encouraged to buy more. That results in shortages, rationing, inferior product quality and illegal markets.
Venezuela and India are recent examples of the failure of price controls.
Price controls discourage research
Price controls also are disastrous for innovation. Our drug prices may be high, but they also pay for research and development. The United States does the bulk of pharmaceutical innovation compared with the rest of the industrialized world.
According to Richard Owens, a senior fellow at the Ottawa-based MacdonaldLaurier Institute, “Out of 56 countries ranked for their contributions to global pharmaceutical innovation, the U.S. ranks first while Canada (which has price controls) ranks 27th.”
The health care industry already is one of the most regulated industries in America and, according to the Peter G. Peterson Foundation, since 2009, “the average retail price of brand-name prescription drugs has more than doubled in inflation-adjusted dollars.”
To compare, regulations do not overburden the television set industry. And televisions are “99.24% lower in 2023 versus 1950 (a $992.43 difference in value),” according to the Official Data Foundation’s analysis numbers from the U.S. Bureau of Labor Statistics. The industry’s products became less expensive when adjusted for inflation, bigger and immeasurably better because the market drove investments in innovation.
I don’t blame Biden for pursuing price controls. They are popular. Yet popularity does not make price controls any less of a failure.
And I can understand blaming businesses for their prices. Businesses do control the prices on their products, after all. But before assuming an evil motive for high prices, at least consider the possibility that the government could be part of the problem.