Politics & Policy

Controlling Authority

Speaker Pelosi's plan for price controls.

With a Democratic takeover of the House of Representatives increasingly likely, Rep. Nancy Pelosi has already promised to impose price controls on prescription drugs within her first 100 hours as Speaker.

She doesn’t call them price controls, of course. Thanks in part to the gas crisis of the late-1970s, Americans simply don’t believe that the federal government can mandate lower prices like some magic trick. So price-control advocates like Pelosi have cleverly changed their terminology by calling their tactic “price negotiations.” But they’re not fooling anyone with their linguistic smoke and mirrors.

The call to lower drug costs is hardly a surprise. Since the inception of the prescription drug benefit, the divergence of opinion regarding the program has continued to widen — especially because it’s the most expensive government entitlement program in history. Further, it will soon surpass Social Security as the nation’s largest unfunded liability.

But if you think that’s expensive, just wait until the liberals take over Congress.

Today’s proponents of “price negotiations” are no different from yesterday’s “price control” supporters. They want the government to set prices below their fair market value — plain and simple. They believe that doing so will save us all money. But they’re wrong. No one — not even the U.S. Congress — can defy the laws of economics.

These “negotiations” would have terrible consequences: They would create shortages, stunt new development, generate red tape, increase government intrusiveness into patients’ health-care decisions and eventually raise drug prices.

The historical record is clear: Price controls always have the opposite of intended effects.

Airfares were higher, not lower, after price controls were imposed in 1938. When price controls were finally removed from the airlines industry 25 years ago, prices fell dramatically.

Price controls imposed to stop skyrocketing inflation during the 1970s were also spectacularly unsuccessful. When President Reagan removed price controls on gasoline, long gas lines evaporated and the price of gasoline fell sharply.

Even the prospect of price controls creates havoc.

In 1993, President Clinton introduced a health care proposal to allow the federal government to set prices for new “breakthrough” drugs. Almost immediately, research and development activity in the pharmaceutical industry plummeted.

In the dozen years preceding the introduction of Clinton’s health care proposal, the R&D budget of drug companies averaged about 11 percent a year and never fell below 7 percent. Then suddenly, in 1994 and 1995, R&D budgets fell to 3 percent and 4 percent respectively as the debate over health care dragged on.

Only in 1996 — after Congress rejected Hillary Care — did pharmaceutical research and development in new drugs rebound back to the 11-percent range where it has remained ever since.

Medicaid is another great example of how price controls backfire. According to the Government Accountability Office (GAO), a 1990 law requiring pharmaceutical firms to grant a 15-percent discount for Medicaid purchases ended up raising managed care prices.

Price controls also would create other huge disincentives for companies to develop new life-saving drugs. Not only would price controls curtail overall research but they also would divert it into less risky and less promising areas — particularly with regard to seniors.

In other words, if drugs that are primarily used by seniors suddenly are made unprofitable by federal decree, the drug industry would lose all incentive to develop new cures for diseases — such as Alzheimer’s — that affect mostly senior citizens. Companies instead would focus on developing cures for which demand is more evenly spread among different age groups.

Such government-imposed distortions would compel the drug industry to shift R&D resources out of the seniors’ market. The end result would be a stealth form of drug rationing to old people.

The damaging effects of price controls are so widely acknowledged by economists today, one has to wonder whether proponents of price controls for Medicare Part D don’t really have a hidden agenda — to bring the new program to its knees so they can “rescue” it with socialized senior care — a universal, single-payer system that puts healthcare entirely in the hands of government bureaucrats.

If you think the outlook for the new Medicare prescription drug program looks problematic now, put price controls on top and watch it collapse for sure. But then, that may actually be the cynical strategy price-negotiation proponents are pursuing: Destroy an admittedly flawed, fledgling program in order to raise up from its ashes a socialist system in which everyone is equally miserable.

Medicare Part D certainly has its problems. But “price negotiations” are hardly a solution. If Nancy Pelosi truly wants to improve the drug benefit, she should focus on transforming it into a truly market-based, consumer-driven program. But if she’s the next Speaker, I certainly won’t hold my breath.

 – Lawrence A. Hunter is the former staff director of the congressional Joint Economic Committee. He currently serves as a consultant to the pharmaceutical industry.


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