Housing, car and food prices are rising faster than at any time in four decades. In response to this record inflation, policymakers considered a series of reforms, including raising interest rates. Why doesn’t Congress put price limits on every car, house, and gallon of milk sold in the United States?
Because it’s a ridiculous idea, of course. Price controls invariably lead to shortages and a downward economic spiral.
Public officials from all political persuasions generally recognize this fact, except in the case of prescription drugs. For some reason, lawmakers are more determined than ever to impose price controls on drugs. If successful, new cutting-edge treatments will become scarce.
The main problem with price controls is that they distort the forces of supply and demand. Under normal market conditions, buyers and sellers interact freely, generating a constant flow of information about their preferences, ultimately arriving at a price that both find acceptable. This price, in turn, influences how much consumers buy and how much sellers make available.
Now imagine that the federal authorities decide that paper towels are too expensive and cap their price below the market price.
Consumers would buy more paper towels than normal because they could afford them. But manufacturers would produce fewer rolls because the product would no longer be as profitable. The result would be a shortage: no one would be able to find paper towels to buy.
Some major cities impose price controls on rental housing, which has led to severe shortages and notoriously long wait times. In rent-controlled Stockholm, the average wait for an apartment is nine years.
But lawmakers from both parties continue to propose legislation that would artificially limit what pharmaceutical companies can charge for drugs. The latest version of this idea is part of the Democrats’ Build Back Better spending program.
The bill would give Medicare the power to lower the prices of popular drugs. But that would distort the prescription drug market.
The end result would be a dramatic decrease in the production of new drugs. After all, it costs an average of $2.6 billion to invent a new drug and bring it to market. If pharmaceutical companies are guaranteed to lose money, investors would flee the pharmaceutical sector and medical innovation would stagnate.
The effect on our future health would be considerable. New analysis from the nonpartisan Congressional Budget Office found that controlling drug prices could lead to a 10% reduction in new drugs entering the market over the next three decades. This translates to 40 fewer drugs reaching patients in need.
Some estimates are even larger. University of Chicago economist Tomas Philipson predicted that under a drug pricing proposal similar to that included in Build Back Better, up to 342 fewer drugs would be approved by 2039.
Certainly, Americans pay too much at the pharmacy. That is why, instead of resorting to price controls, legislators should go after the companies truly responsible for high drug costs, namely the pharmaceutical industry intermediaries known as pharmacy benefit managers, or PBM.
Insurance companies use these opaque entities to obtain discounts and rebates from drug manufacturers. In 2020, PBMs achieved approximately $187 billion in savings. Such massive price reductions could be used to save patients money over the pharmacy counter – but instead, PBMs and insurers are keeping the vast majority of funds for themselves. Requiring greater transparency and accountability from these intermediaries could lower the price of medicines for patients.
Saul Anuzis is president of 60 Plus, the American Association of Older People. This column was provided by InsideSources.