The problem with drug price controls

 President Biden’s war on drug prices is a prescription for shortages and fewer new and innovative drugs. To make matters worse, he keeps bragging about his populist reforms as if they are going to solve the problems with our healthcare system, the economy, the itch, the stitch, palsy and the gout. But he isn’t very convincing when he delivers the message, because his reasoning for passing bills changes depending on which audience he is talking to. His goal is merely to bask in the limelight of his populist agenda.  

But his policies are going to have long-term consequences. 

The problem is that populism is good for creating a message that will resonate, but creating public policy from that populism can be dangerous. For instance, drug prices are a target for almost every politician that has a soap box to speak from, but supporting legislation that merely cuts or lazily caps those prices is ill-advised and troubling. Unfortunately, Biden’s Inflation Reduction Act did just that, allowing the government to cap the prices of drugs and charge pharmaceutical companies an onerous tax of 95 percent if they don’t comply with the caps. 

Recently, the Biden administration published a list of the first drugs to face this new government hurdle, and it was mainly diabetes and cancer drugs. 

The economic and investment outcomes of this policy are easy to identify for entrepreneurs, but Joe Biden isn’t an entrepreneur, and doesn’t seem to have any around him. However, we no longer need business experts to explain just how price controls and increased regulation hurt access to care — we have a real-life example of the effects of this policy. Japan currently lacks access to 143 new drugs that are available in the West. 

That is a lot of drugs for a developed country to lack access to, and some of them will never be available. 

The problem for Japan is two-fold. It is too expensive to gain approval for the Japanese market and drug companies aren’t allowed to charge enough to make that money back. In fact, the Japanese government forces price reductions every few years, making the prospect of profits even lower. So, pharmaceutical companies are left with a fairly easy choice: enter the Japanese market and lose money, or don’t. 

The problems will be bigger in the U.S. Japan can always change their policies and those 143 drugs will quickly be available. However, with the passage of the IRA, some new drugs will never be developed. Most of the research and development for new drugs is done in the United States; if that research never happens, the drugs won’t exist. President Biden — or some future president — won’t just be able to come to his senses and flick a switch that brings lifesaving drugs to market. 

New drugs cost around $2 billion to bring to market in the U.S. That is a big investment, given the risks and short lifespan of the patent once the drug actually makes it to market, but because pharmaceutical companies were previously able to recoup this cost and more, the risk was worth it. With a government already setting the prices of some drugs, though, pharmaceutical companies will be less likely to risk their money on long-shot drugs, investors will be less likely to back BIO startups, and with a lower likelihood of licensing their innovations, colleges and universities will be less likely to dedicate the resources they currently do to groundbreaking research. 

This doesn’t mean that the president should stop delivering a populist message. Populism sells. But the only way to actually solve the problem is to focus on real solutions. Drug prices are high, but why are they high? How could the U.S. drive even more innovation in drug development? The answers are available, but they require making decisions that might give some on the left heartburn. 

Healthcare is full of middlemen, like pharmacy benefit managers (PBMs). While PBMs do increase the price of drugs, the reason they have a role in the market at all is that we currently have a system where the patient is almost never the payer. When the patient is the payer, drug prices are often reasonable. Of course, Biden could pursue another populist policy and outlaw PBMs, but the real solution is to let the market decide if they actually provide a service, or if they are just a drag on the system. 

Populists want to address the symptom, but addressing the symptom is often like bandaging an infected wound and forgetting about it: it just makes a bigger problem. The real solution is to give patients options. Bring the market back to healthcare and watch the competition bring prices down. It won’t be fast, but it will be better than looking back in 20 years and wishing that some drug that doesn’t exist because of bad public policy. 

Charles Sauer (@CharlesSauer) is president of the Market Institute and author of “Profit Motive: What Drives the Things We Do.” He has previously worked on Capitol Hill, for a governor, and for an academic think tank. 

https://thehill.com/opinion/healthcare/4279543-the-problem-with-drug-price-controls/