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Why Medical Price Controls Would Be Catastrophic

Another case of government meddling masquerading as altruism

By guest author Daniel Savickas
March 29, 2022

Inflation is running rampant, tensions in Eastern Europe have boiled over, and the world is still amidst the tail end of a global pandemic. Despite all this, federal lawmakers seem intent on repackaging some of the failed, wrong-headed policy proposals of the last few years. The latest includes a push for greater government intervention with in pharmaceuticals with drug price controls.

A cadre of Democratic House members are now urging congressional leadership to move swiftly on a proposal concerning prescription drug prices. The proposal would let Medicare negotiate with drug manufacturers for lower prices. It would institute a penalty for manufacturers who increase the price of their products at a rate greater than inflation. There is also a provision that institutes a hard $35 price cap on insulin. Unfortunately, all these proposals would severely damage the market and slow down drug innovation at a time when innovation is needed more than ever.  

At first glance, Medicare negotiation might seem like a decent idea. After all, there is no reason why negotiations shouldn’t be a part of a market-based solution. However, that assumption is incorrect on its face. A market-based negotiation assumes both parties have the ability to come to an agreement in good faith and can walk away if talks break down. Given that Medicare is a government entity, the playing fields are nowhere near level. The government is in charge of taxing, regulating, and potentially bringing action against these pharmaceutical companies. These “negotiations” would not be characterized by a desire to find mutual interest, but would be driven rather by force and coercion.

An inflationary penalty would be a similarly destructive policy. By creating a penalty—or even an outright ban—on price hikes greater than the rate of inflation, the government is actually incentivizing higher list prices. If drug manufacturers know they will be unable to raise prices beyond a meaningful number, they will be forced to introduce new cures at exorbitant prices to hedge their bets against any unforeseen circumstances. Once again, the assumptions of government central planners will backfire and have the opposite of the intended effect.

The insulin provision is an even more blatant price control. It will also end up having the reverse effect. While insulin prices are a concern for millions, there is a reason prices are so high. Part of it can be attributed to the cost of innovation in the market. Another part can be attributed to the fact that price controls elsewhere necessitate cost offsets domestically. A stringent price control in the United States would create a free rider problem of our own. To mitigate the effects, drug companies would have to limit supply or production to avoid massive blowback. This would lead to potentially worse rationing than we are seeing now.

All of this is seemingly ironic, given the example of coronavirus vaccines that have emerged in just the last year. Pharmaceutical companies invested millions in research and development, and were given broad leeway from regulating authorities. The result was three vaccines developed in record time with proof of life-saving benefits. In fact, some of the most prominent advocates for these vaccines, like House Speaker Nancy Pelosi (D-Calif.) are the same people who are now pushing price controls and restrictive drug pricing policies.

Price controls will stymie the same type of research and development that produced these vaccines. The consequences down the line could be cures for any number of diseases. These are the hidden costs of price controls. The most costly medicines in the world are those you cannot access because they have not been made. While that won’t be reflected monetarily, the lack of new and innovative cures will carry a heavy human cost. 

All members of Congress ought to recognize the clear disconnect between these two stances. The reason the nation has the vaccines is because of the lack of price controls. Drugs may cost more in the United States because of the enhanced quality and access afforded the American people. Especially after the last two years, lawmakers must be very wary of anything that could jeopardize the United States’ leadership in drug development. Instituting price controls would be a step back in fighting current and future diseases.

Daniel Savickas is the government affairs manager for the Taxpayers Protection Alliance.