Friday, January 12, 2007

Price Controls on Prescription Drugs

One of those things (like increasing the minimum wage) that sounds great, until you start to apply any sort of economic reasoning. At which point, the case pretty much falls apart.

The economics are straightforward enough – once the government sets the price below the market, both a greater quantity of medicine will be demanded, and lesser amount will be supplied.

It certainly makes a great soundbite to be able to say that Uncle Sam has taken on the vicious profiteers of Big Pharma on behalf of the “little guy”. What they’re not telling you is that they can only do this at the expense of developing new drugs in the future. (Douglas Schoen provides some interesting polling data on what happens to support for this proposal once survey participants are made aware of some of the likely consequences. Not surprisingly, it goes way, way down.)

Kinda like when they told the poor that they were going to get an increase in income by raising the minimum wage. Nobody bothered to point out that unskilled, mostly minority, teenagers will be thrown out of work, or be unable to find jobs.

Of course, once the government gets into the business of “negotiating” prices for Medicare Part D, it seems likely that the prices will come down, if only due to the fact that no one ever really “negotiates” with the government. The combination of overwhelming power and bureaucratic capriciousness are simply too much for most companies.

The actual effects – increasing the demand for drugs by lowering the prices - combined with disincentives to produce new drugs, doesn’t bode well for the future.

Sally Pipes’ comparisons to the VA program are quite alarming:

“Only 19 percent of drugs approved by the FDA since 2000 are listed on the VA formulary, and only 38 percent of drugs approved in the 1990s are listed. That’s why Medicare offers more than 4,300 different drugs while the VA plan offers only around 1,300.”

As the government becomes more enmeshed in controlling healthcare, and healthcare costs, there will be less choice offered to patients, reduced ability to fund the development of new drugs, and reduced quality of care. Down the road of price controls lies rationing. With rationing comes reduced life expectancies, as well as corruption, since one can only expect that rationing will be either based on waiting in queue, or by political preference.