SCHATZ: Price Controls Have Never Worked, And They Won’t Work On Drug Prices

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Thomas Schatz Citizens Against Government Waste
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Editor’s note: We endeavor to bring you the top voices on current events representing a range of perspectives. Below is a column arguing that price controls have never worked and will not succeed in lowering drug costs in the long term. You can find a counterpoint here, where Nan Hayworth, an ophthalmologist and former Congresswoman for New York’s 19th congressional district, argues that price controls on prescription drugs will be beneficial to the American people and will ensure that Americans will never pay more for drugs than people in other developed countries.

Price controls distort markets, create shortages and exacerbate the problem they are intended to solve. This has been true for thousands of years. In their 1978 book, Forty Centuries of Wage and Price Controls, authors Robert Scheuttinger and Eamonn Butler reviewed the damage caused by price controls, from the Babylonian Code of Hammurabi, to President Nixon’s Economic Stabilization Act, to rent control in New York and San Francisco.

Tens of millions of Americans still remember what happened when President Nixon imposed wage and price controls in the early 1970s to try to control inflation. There were long lines at gas stations, ranchers stopped shipping cattle to markets, and food shelves were sparsely stocked. Stabilization in prices occurred only after the controls were lifted.

While everyone would like to pay less for drugs, price controls are a prescription for disaster. They have resulted in less access to innovative biopharmaceuticals in the countries that use price controls as an integral part of their socialized medical systems. While U.S. residents got access to 96 percent of new cancer drugs between 2011-2018, people in Germany, Ireland, Japan, and Switzerland got access to 73, 51, 54, and 62 percent, respectively.

The use of price controls has also led to substantially less research, development and innovation. The Association of the British Pharmaceutical Industry reported that in 2016, the U.S. conducted 58 percent of global R&D, which is 53 percent greater than the 38 percent in 1990, and more than twice the 28 percent of R&D conducted in the EU. This builds on a 2006 National Bureau of Economic Research study, which found that in the late 1980s, European pharmaceutical R&D spending exceeded the U.S. by 24 percent, but by 2004, the EU trailed by 15 percent.

President Trump has said that the United States will never be a socialist country. And he had been implementing policies that encouraged innovation, improved health outcomes and drove down costs, like giving states more flexibility to utilize State Innovation Waivers to drive down insurance premium costs while protecting people with pre-existing conditions, and expanding the use of telehealth for Medicare patients. But he undermined much of this progress with his Executive Order for most-favored-nation (MFN) drug pricing, which will fail to lower costs in the long run and lead to less innovation.

The idea is being promoted as a way to lower drug costs in Medicare Part B and D by paying the lowest price for a drug sold in a small group of foreign countries, which is even more restrictive than the use of an average price that had been considered in an earlier proposed rule, known as the International Pricing Index (IPI). In that proposal, a group of 14 countries with comparable economies were considered to come up with an average price. But their low drug costs are artificial and arbitrary due to price controls.

Exactly how the most favored nation pricing policy would work is unknown, which also raises concerns. The IPI proposal, which was not finalized, called for a demonstration model to determine if lower costs could be obtained only under Part B. Medicare Part D is a much different program than Part B so a new model would have to be created. Prices may be lower in the short run, but in the long run the MFN policies would be very destructive.

Large segments of government-run health care programs already use some form of price controls that have distorted the market, including the VA drug benefit that uses statutorily mandated prices and discounts, Medicaid’s drug rebates on brand and generic drugs and the 340B drug discount program, which has grown exponentially since 2014 when it was expanded under the Affordable Care Act and is now being used by hospitals and contract pharmacies to line their pockets because of unclear language in the law.

Doubling down on price controls will not solve the problem of high drug prices. It will only make matters worse.

This idea of importing a price control system that has devastated pharmaceutical R&D across the world makes no sense. There is no reason to radically change the system that has allowed the U.S. to lead the world in the development of vaccines for both COVID-19 and new drugs for other diseases.

The most effective way to reduce drug prices is faster generic drug approvals and better trade deals that make U.S. trading partners pay their fair share of drug research and development. Price controls are always the wrong answer to lower prices at any time and in any industry.

Tom Schatz is the president of Citizens Against Government Waste.