The Pelosi price control plan for drugs would limit Americans’ access to lifesaving medicines. It has the added benefit of impeding the development of new treatments for diseases. Her plan is price control of drugs. Her plan doubles down on the failures of existing government policies. Yes, the same ones contributing to higher health care costs today.
The Plan
It establishes a government price control system. This proposed system would base drug price on an average of the prices set by foreign governments. The actual cost to produce is not a consideration. The cost of research and development is not considered. The value of human life is not a consideration. Do we really want foreign governments controlling out drug prices?
What is considered is the government imposed prices of drugs in countries already using nationalized healthcare. The measure would set an upper price limit. The upper limit would then be multiplied by 1.2 times a drug’s average price in six other countries. Those countries are: Australia, Canada, France, Germany, Japan, and the United Kingdom.
The comparison
The system is every bit as rational as getting six neighbors together. Then having them decide how much lawn mowing is worth. Say they decide the agreed upon rate is $14.5 per yard. That is two hours work at minimum wage. The average yard is half an acre. Based on the size of the yard it seems reasonable. The yards have the usual types of obstacles must be negotiated. A person mowing an average half acre lawn takes 1.9 hours to do the work. That’s what they decide is the average.
Here’s the issue. The person doing the work has transportation costs and must account for travel time to and from the job. The mower would burn a full tank of gas, use some oil and the purchase price of the mower has to be recouped. Then there is accounting for the wages, income taxes, FICA, PPACA, workers comp and of course liability insurance. There’s governmental reporting, quarterly taxes, regulatory costs and licensing those things also costs money. The accountant’s time has to be paid for.
No one will take the job. Not only is it hot pushing the mower in the sun, but the neighbors nitpick constantly, and they demand credit terms and control of what time the job will be done. Bottom line the neighbors can’t get their lawns mowed.
The plan operationally
Operationally under the Pelosi price control plan for drugs the health and human services secretary then would negotiate prices below the upper limit for as many as 250 drugs each year. The price resulting from these negotiations would be applied throughout the U.S. market.
The government would require manufacturers to offer that price to private payers and the public. Manufacturers that deviated from that price would face massive civil monetary penalties. A manufacturer declining to negotiate the price of its products would incur stiffer penalties. That would come in the form of an excise tax. The excise tax would be equal to 75% of the revenue derived from the product the preceding year.
What happens now in healthcare?
The bill represents an unprecedented exercise of raw government power. The federal government already imposes price curbs across a range of programs. It requires manufacturers to pay the government rebates in Medicaid, discounts in Medicare, and to make various price concessions in the Veterans Affairs health system. Did you know that?
These provisions all are confined to federal programs. Nonetheless they have distorted drug prices throughout the health sector. It’s one thing for the government to dictate the prices it pays in programs it finances. It is quite another for the government to impose a price for a product’s private sales.
Use of police power in setting prices
Aggressive government price-setting has damaged innovation. It limits access to new treatments. Both of those things happen in all six of the countries whose price controls the bill would import. If the U.S. adopts price controls, it risks the same results.
Access to new drugs is currently much greater in the U.S. than in countries with price controls. Companies who cannot make money under the system will simply withdraw from the market. Of new active substances introduced between 2011 and 2018, 89% are available to Americans, compared with 62% in Germany and 60% in the United Kingdom.
One-half or more of these new therapies are unavailable to Australian, Canadian, French, and Japanese patients. This lack of access can have damaging effects. A study by IHS Markit examines outcomes for non-small cell lung cancer. This is the leading cause of cancer mortality in the U.S. and the world.
Small cell lung cancer example
The report compares American outcomes with that disease, with outcomes of citizens of countries, in the price setting group: Australia, Canada, France, and the U.K. The study concludes that Americans gained 201,700 life years as a result of faster access to new medicines. The study finds half the life year gains are lost if Americans have the same access to treatments as patients in the price setting group. Are you good with that?
Patients will be worse off if Washington emulates the price control regimes of foreign governments. Countries with price controls also suffer a reduction in pharmaceutical research and development. In 1986, European firms led the U.S. in spending on pharmaceutical research and development by 24%. After the imposition of price control regimes, they fell behind. By 2015, they lagged the U.S. by 40%.
Monkey see, monkey do
If the U.S. emulates the European price-setting example, innovation almost certainly will suffer. Trading innovation and access to new medicines for lower prices on existing products may strike some as a good deal. But according to the president’s Council of Economic Advisers, it wouldn’t be. The council concludes that price controls might save money in the short term. They would certainly cost more money in the long run. It costs lives in all cases. Government price-setting, it wrote, “makes better health care costlier in the future by curtailing innovation.”
The debate
As the public debate over health care has become more contentious. It also has become more clarifying for those paying attention. On one side are those who advocate increased federal control. They assume government has the best interest of the citizens at heart. They advocate use of police power over the allocation of medical goods and services; price controls on drugs and services, “Medicare for All,” and more federal spending on failing programs. Is that what the America of tomorrow is about?
On the other side are those who acknowledge problems with the healthcare system. Many of those problems have a governmental cause or the government intervention worsens them. Never the less, they advocate for reforms that build on our healthcare system’s best features. Among the things worth preserving in the U.S. are innovations that save lives and that cure or ameliorate chronic diseases. Governments do not produce those advances; markets do. Is that what the America of tomorrow is about?
Conclusion
Policymakers face a choice. They must choose a consumer centered reform that advancing innovation and saving lives. We call it a capitalist solution. Or, they must choose a government policy that restricts treatment options for patients, creates wait time, prevents required R&D and causes shortages. The Pelosi price control plan for drugs bill makes the wrong choice. But we will fight about it in the District of Columbia because the Democrats are trying to force a socialist agenda on our capitalist economy.