The Disastrous Consequences of Price Controls on the American Pharmaceutical Industry
The Disastrous Consequences of Price Controls on the American Pharmaceutical industry
Prices of pharmaceutical drugs in the U.S. have been skyrocketing due to big pharma’s capital greed for profit. Americans now pay two to three times more for life-saving drugs than other developed countries, resulting in 30 percent of adults avoiding medication due to cost barriers. This American health crisis has widened medical inequities due to pharma companies manipulating supply-and-demand to take advantage of medicine being a relatively inelastic good.
In the face of this problem, many proponents of cheap prescription drugs have advocated for price controls on the pharmaceutical industry. Definitionally, price controls are a government regulation establishing a maximum price on a specified good.
However, what has largely been ignored are the unintended consequences of such policy, that could potentially wreak greater havoc to American society. Specifically, by disrupting innovation, delaying the release of drugs, and affecting the quality and quantity of pharmaceuticals in the developing world, price controls on the U.S. pharmaceutical industry should not be imposed.
Price Controls Stunts Pharmaceutical Innovation
Pharmaceutical innovation is integral to patient health. By curing diseases, minimizing symptoms, and providing preventative care, the output of pharmaceutical drugs has played a major role in increasing human life expectancy. For example, drugs launched after 1981 are estimated to have saved 149 million years of life in 2013 alone. From a historical perspective, innovation has saved countless lives by innovating cures to sixty-six diseases in twenty-seven countries.
Consequently, we must consider the cost of pharmaceutical innovation before we demonize these drug manufacturers for charging exorbitantly high prices. In fact, the research and development that goes into the manufacturing of one medicine costs more than $2.6 USD billion.
Expectedly, American investors and companies absorb these overwhelming risks with the belief that free market pricing will allow them to recoup these short-term losses. However, a government-regulated industry would affect the profitability of R&D investments, stifling industry output of new drugs. In fact, a study found that between 1981 and 2001, there would have been 330-365 less new drugs introduced to the market had the U.S. government imposed price controls on the industry.
To make matters worse, not only would U.S. price controls affect the innovation output of American pharmaceutical corporations, but it would stunt global pharmaceutical research. This is because U.S. markets are responsible for approximately 64 to 78 percent of global pharmaceutical profits, representing a key market for global drug producers. As a result, if the profitability of the U.S. pharmaceutical industry is affected by price controls, foreign companies would also pull out of R&D ventures due to exorbitantly high risks in recouping investments.
The Effects on Timely Access
In addition to disrupting innovation, price controls significantly degrade patient well-being by delaying access to critical pharmaceuticals. Specifically, the inevitable price and reimbursement negotiation process for each drug between the company and government would delay the time that a drug is released into the controlled market.
To quantify this delay, the introduction of new drugs in a price-controlled market lags about 1.6 to 2.6 years behind free markets. While such delays can seem insignificant in the long-term, studies have shown that approximately 600,000 European deaths could be avoided annually if the price controlled market offered more timely treatments.
Consequences Bared by the Developing World
The reality of being a world superpower, such as the U.S., is that domestic policies often have global repercussions. In this case, price controls on the pharmaceutical industry affect the quality and quantity of drugs in the developing world.
According to the status quo, U.S. pharmaceutical companies charge significantly higher prices to Americans as they are willing to grant price concessions or donate drugs to low-income countries. In other words, lowering drug prices has a zero-sum game quality, where increasing the price of drugs in one region may cause prices to spike in other areas.
As a result of Americans absorbing higher drug costs, the average patented drugs in developing countries cost less than 20 percent of those in the United States. The prices of pharmaceutical drugs matter disproportionately more to low-income countries where the depth of poverty is severe and access to doctors and hospitals is scarce.
As an influential nation that believes in global altruism, the U.S. government should consider the impact of price controls on philanthropic initiatives by pharmaceutical companies such as drug donations and price concessions. When incomes in the U.S. are astronomically higher than in developing countries, should Americans not shoulder some of the burden for impoverished communities?
So, Are the Proponents of Price Controls Right?
The fundamental argument that the proponents of price controls make is that such policy would increase affordability and access to drugs by lowering prices. However, this argument fails to consider various implications on the supply of drugs, the cost savings from preventative care, and the accessibility of generic drugs.
Firstly, in the status quo, the approval of generic drugs from the FDA are increasing, which has sparked increased competition among manufacturers to lower drug prices. Consequently, generic drugs—which represent 90 percent of all prescriptions dispensed in the U.S.—are cheaper in America than in other countries with price control schemes.
Secondly, drug innovation—a feat unattainable with price controls— saves more money for consumers through expedited treatment and preventative care, which has increased productivity in the U.S. economy by 5.5 million work days per year and approximately $233 USD billion in wages annually.
Ultimately, while price controls might seem effective from a macroeconomic perspective, such policy has significant consequences to Americans and citizens worldwide that outweigh the perceived benefit of increased affordability. So, the next time you walk into a CVS store and find yourself outraged by the high pharmaceutical prices, know that the real price being paid is more than just capital greed. It’s about saving lives.