Lowering Drug Prices

 

The high price of drugs is an issue that politicians flock to like moths to a flame. It makes them feel important as they register their outrage and their determination to do something about it.

But interfering with the free market forces that control our economy is fraught with disaster. Price controls and other government interference in the market usually leads to unintended consequences – like shortages, fewer jobs, or both.

Case in point is what is happening in state legislatures in a vain attempt to control drug prices. The Wall Street Journal editorial board calls attention to the states of Nevada and Maryland where lawmakers are passing bills to punish drug companies without benefitting patients.

Nevada Republican Governor Brian Sandoval vetoed a bill on diabetes medication. The bill passed easily through the legislature and may make a comeback. Here’s what the bill proposed according to the WSJ:

            “The state would have decided what counts as an “essential” diabetes medicine, including insulin and others. Manufacturers would be required to disclose the cost of production and marketing, as well as profits and more. That information is proprietary and hard to calculate, as the cost of medicines is influenced by research and development over many years.”

            “Manufacturers would have to inform the state 90 days in advance of any price increase, which is nothing but a heads up to the folks running the public shaming campaign. Some purchasers would stockpile meds before the price ticks up, which could lead to shortages. The bill requires new disclosures for pharmaceutical representatives, and industry already regulated by the Food and Drug Administration.”

 

In other words, politicians want to tell these drug companies to reveal their trade secrets and their financial status so the government can tell them how much they are allowed to charge and how much profit they are allowed to make. If allowed to happen, this kind of government interference is likely to lead to fewer manufacturers – which will lead to higher prices!

Competition always leads to lower prices! This tried and true Economics 101 fact is displayed in the following graphic:

An FDA analysis in 2005 revealed that patients pay 94% of the branded price when a medicine has one generic competitor. That falls to about 20% of the price when eight companies are competing for market share. The graphic clearly shows the more companies producing the drug, the lower the price.

The solution to high drug prices is therefore, more manufacturers, not fewer. But the politicians attack the manufacturers, making competition less likely. The state of Maryland recently gave the Attorney General the authority to investigate any generic drugmaker responsible for an “unconscionable” price increase. The WSJ says “the left defines unconscionable as paying money for any health-care product or service.”

They say that generic drugs fill nearly 90% of all prescriptions but account for only 27% of total drug costs. State and federal programs are among the largest purchasers of generic drugs, and in 2015 generics saved more than $32 billion in Medicaid alone. Generic drugs saved Maryland $3.7 billion in 2015.

Increasing the number of generic drug manufacturers has been a problem under previous administrations. That looks to change under new FDA Commissioner Scott Gottlieb who is on a mission to increase the number of companies making generic drugs. Gottlieb is preparing a plan to drive more generic innovation and competition, including streamlining the approval process. Such changes will lower drug prices for everyone, unlike the politicians who try to impose their own solutions.

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