Background
Last year, in May, eighteen Senators including Bernie Sanders, Elizabeth Warren, Dianne Feinstein, and Dick Durbin sent a letter to President Trump asking that he “take action to lower costs” of pharmaceutical drugs (1). The same drugs for lower prices? It’s too good to be true! That’s because it is. Instilling price control would ironically hurt the consumers it is meant to support.
U.S. vs Europe
Many in support of price control compare our prices to some European countries like the United Kingdom and Spain as proof that in the US companies take advantage of patients because of the lack of price control. However, in the scientific world, when you want to prove causation you must change only one variable and keep all other constant. In the comparison between Europe and the U.S. there are many other factors that can explain this price change including other policies (single-payer healthcare [2, 3]) or more likely the quality and quantity of drugs.
Currently, the United States is a global leader of drug research in any measuring system. The United States has 99 Nobel Prizes for Physiology and Medicine (the most in the world) and three times more than the country in second place, the United Kingdom with 30 (4). The U.S. also creates roughly half of all clinical trials on drugs in the world and the most documents in medical research (5, 6). Finally, the U.S. almost doubles the creation of new drug molecules compared all of Europe combined (7).
Not only is the U.S. leading in volume, but also in quality. The U. S. is third in average citations per document, meaning that our documents use a vast array of information to create accurate results and third in the average amount of papers that cite our documents. (6, 8) Our rank is decreased simply because of the sheer volume of documents produced (6,8). Furthermore, because Europe uses older drugs on average compared to the US, the US clearly stomps over Europe in quality which would obviously lead to higher prices (9, 10). This quality and quantity is important since it increases our life expectancy by 1.23 years every year and reduces premature death (11).
Incentive and Innovation
However, if we were to impose price control this quality and quantity would greatly reduce. By artificially lowering prices, the incentive to invest disappears. This relationship between incentives and drug development can be through the Orphan Act of 1983 and recently Medicare Part D. The Orphan Act gave orphan drugs, or drugs which cured rare diseases, extra patent time. A study on this act showed that the act significantly increased the number of orphan drugs on the market and increased private and public investment in the orphan drugs (12). Medicare Part D which covered prescription drug costs was shown to increase drug trials especially for drugs which patients on Medicare Part D used the most (13).
Risk Without Reward
Furthermore, with limited profits many companies will fail since the pharmaceutical industry is the riskiest market. According to the Journal of Economics the cost of creating a prescription drug is $2.5 billion (14). And this cost is continuously raising because of “increased complexity of clinical trials, a greater focus on chronic and degenerative diseases, and tests for insurers seeking comparative drug effectiveness data” (14). Most of this cost comes from the failure of drugs with, on average, only one in ten drugs making it into the market (15). However, this risk obviously skyrockets even higher for drugs which try to target concerning, and complex conditions such as drugs targeting Alzheimer’s--with its 99.6% chance of failure (15). When drugs fail, they can destroy small companies while ruining large companies to some extent. For example, when Bristol-Myers Squibb announced a failure in the drug Opdivo, which treated cancer, their stocks dropped by 35% (15).
Free Market Imbalance
Even if you do not believe that our high prices lead to higher quality, the status quo remains a superior option to price control which would disrupt the free market. In order to understand why our current system works and why government intervention would be a catastrophe, one must understand two fundamentals of economics. The first is the laws of supply and demand which states that when supply increases but demand stays the same the equilibrium, or the price which benefits the producer and buyer equally, drops. Inversely, when demand increases but supply remains the same the equilibrium rises (16). The second is the law of risk and reward which states “the higher the risk, the higher the potential return” (17). Therefore, when the government intervenes in the free market, it always, in some aspect, breaks a rule of economics which has massive effects. Because the equilibrium is always fluctuating, if we were to impose price controls, the government would have to constantly rewrite the law on the price. This process would take extremely long since the average time for a bill to become law is roughly 264 days and will probably grow since government officials are becoming more polarized every year (18,19).
Therefore, the set price most likely will not be at the equilibrium level leading to a wide variety of problems. In the case of a low price under the equilibrium, the demand for a drug would skyrocket while supplies remained the same. This would create a scarcity of the drug and people’s carelessness when using the product which could be seen with price controls on gas in the 1970’s (20,21). Inversely, in the case of a high price, the demand for a drug would plummet while supply remained the same causing an excess of supply, a decrease in quality to make up lost profits, or the government buying the supplies consumers do not use (20). However, even worse, the government may be forced to buy up extra supplies consumers do not use which would increase our already hefty debt (20, 22). This can be seen currently with the U.S. and European farm programs that try and raise farmers income by setting a minimum price for goods.
And just to top the whole situation, because producers and consumers will not be equally benefited, the black market and breaking the law would be a way for them to get what they want. This can be seen currently in New York where a rent cap was set making apartments rare to come by. Therefore, in order to make a profit out of this high demand people who move out of a leased apartment keep their lease and sell the space to others at a “under-the-table” negotiation at a higher price then what they originally bought it for (23). Another example of this was in France after the French Revolution when grains and meat had a price cap. Because food now was scarce because of the high demand, many turned to the black market to get questionable food (20).
Lobbying - Reality Check
Even after all this information, if you truly think price controls are amazing, its good intentions will never occur because the pharmaceutical industry has the biggest lobbying group in the US government. The industry has spent roughly $2.5 billion in ten years uses roughly two lobbyists for every one member of Congress and has given campaign contributions to nine out of ten members in the house of Representatives and all but three of the US’s one hundred senators (24). This influence can be seen in the failed attempts of a small amount of Congressmen that attempted to stop the mass prescribing of opioid painkillers (24). With this strong hold on Congress, big pharmaceutical companies can easily take this new regulation to create very high caps, which would make the new law useless, or price generic drugs extremely high or low to push them out of business. With this power the free market becomes unbalanced and throws out competition making monopolies. Furthermore, companies could use odd loopholes which they persuaded Congress to put in or ones they find on their own to surpass the controls while not being productive. This can be seen in President Nixon’s price control on lumber. In the law, there was a loophole that did not set a price control for imported lumber. Thus, lumber producers exported lumber to Canada and imported it back (25).
Conclusion
It’s quite disappointing how the politicians that present these optimistic ideas around never discuss the consequences of price control such as the destruction of the free market, medical innovation, and access to medication. Therefore, before our society falls under the simple answers of an issue, we should challenge these ideas with research. If we question all of these simple solutions we will be able to advance as a society and get rid of the fake politicians in power that do not care enough to make our lives better.
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