Prescription Drug Price Controls: Complex Schemes Endanger Our Health and the Economy

By SBE Council at 12 November, 2021, 9:13 am

by Raymond J. Keating – 

When government steps in with a massive regulatory scheme to control prices in an industry, the effort equates to a Rube Goldberg machine, that is, a way of doing something in an unnecessarily complicated way.

Imposing Rube Goldberg price controls on the pharmaceutical industry means that lives will be diminished and lost. After all, the pharmaceutical industry produces drugs, medicines and vaccines that improve and save lives. But when government seeks to inflict price controls, it is effectively limiting potential returns on innovative endeavors in the areas of drugs, medicines and vaccines that are fraught with high costs, uncertainty and risk.

Keep in mind that due, in part, to strong property rights and not imposing price controls, the U.S. is a global leader in pharmaceutical development and innovation. Indeed, while creating new and improved drugs, medicines and vaccines are costly and complex endeavors in and of themselves, the policy framework for incentivizing these vital undertakings should stand as rather straightforward and simple.

That policy framework is low taxes, a light regulatory touch, and a strong system for protecting property rights via patents. And if elected officials are concerned about affordability for certain segments of society, then that policy choice should be dealt with directly. While any kind of consumer subsidies along those lines, for example, would come with their own costs and consequences, they would not carry the broad negatives for entrepreneurship, investment and innovation in the pharmaceutical industry, and resulting negatives for patients, that price controls would.

But rather than keeping policy straightforward, and aligned with common sense and sound economics, assorted elected officials – currently, President Biden and many Democrats in Congress – continue to push for price controls.

The latest scheme, in true Rube Goldberg fashion, would have the process of price controls getting under way via Medicare, with the HHS secretary ranking drugs according to the amount spent and setting a maximum price on at least the top 20 based on an assortment of criteria and for varying lengths of time. For good measure, for manufacturers that do not accept government price dictates, they would face a 95 percent tax on revenues from the targeted drug. And an inflationary rebate penalty would be imposed on price increases on drugs exceeding the rate of inflation (i.e., another form of price controls).

It’s all rather ridiculous, though with tragic consequences.

While elected officials have long been seeking to inflict price control schemes on an industry that improves and saves lives by producing drugs, medicines and vaccines – while also reducing overall medical care expenditures as drug treatments eliminate needs for more costly treatments – one hopes that the realities of what various drug makers accomplished during the COVID-19 pandemic, that is, producing vaccines in a near-miraculous period of time, would at least give pause to the drive for price controls. But that has not been the case.

And make no mistake, the latest Rube Goldberg price control scheme would build the regulatory infrastructure for the inevitable expansion of price controls. Indeed, this would only be the first step in the march to widespread price controls. Investors certainly understand this fact, and therefore, entrepreneurship would suffer in the industry.

And it must be understood that the pharmaceutical and medicine manufacturing sector of the U.S. economy is overwhelmingly about smaller businesses, with 59.4 percent of employer firms having fewer than 20 employees, 78.9 percent fewer than 100 employees, and 91.3 percent fewer than 500 employees.

The traditional idea of a Rube Goldberg machine is that the machine would produce the same product via its chain reaction, complex process. But when it comes to the Rube Goldberg regulatory scheme of price controls on prescription drugs, medicines and vaccines, the results will turn out quite differently. Price controls not only create unnecessary complexity, but among its consequences are reduced incentives for entrepreneurship, investment and innovation in the prescription drug industry; lost competitive advantage for U.S. firms; reduced high-paid jobs in the industry; and most tragically, again, diminished patient care, including more deaths.

In sum, price controls are a very bad idea and an ideal political tool for undermining the production of new and improved drugs, medicines and vaccines.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.