skip to main |
skip to sidebar
Regulations and the associated bureaucracy directly contribute to ballooning drug costs
By Elliot Young of Catalyst, Powered by the Independent Institute.
"Regulators…mount up!
Inquisitions are nothing new in Washington, especially when it
concerns healthcare, but rarely are they due to a problem coming full
circle. Spearheading the latest probe into “skyrocketing” drug prices,
Senator Chuck Grassley recently dragged executives from seven top
pharmaceutical companies before a Senate Finance Committee hearing to
clear the “great deal of secrecy”
behind how companies set prices. Some lawmakers worried about drug
prices, like Grassley, make vague calls for increased transparency and
legislative oversight, while others propose solutions as radical as
limiting price increases, capping prices, and even fining drug companies
that raise prices. But a case of wrongful conviction is at the root of
all these regulatory proposals, dooming them to failure. The sad irony
is that it isn’t Gordon Gekko, greedy corporations, or a lack of
regulations causing drug prices to spiral out of control: it is
regulations themselves.
Like a pair of handcuffs without the key, regulations can only move
in one direction. Also, like handcuffs, regulations constrain the cuffed
party’s movement. Proponents argue such rules are necessary to prevent
bad behavior. Of course, the Laws of Supply and Demand tell us prices
rise as you constrain supply, and Cost Theory shows how prices are a
function of a firm’s costs. Too often, lawmakers forget to consider
these basic principles when deciding to regulate. Beyond the
foundational considerations of whether a regulation will even accomplish
its stated goal, even more rarely do lawmakers balance the “benefits”
of regulations against the costs of undesired outcomes.
Pharmaceuticals are among the most regulated industries
in the United States, with over 10,000 individual rules and
restrictions, ostensibly in place to protect patients and consumers.
Pharmaceutical companies shell out millions of dollars per year on the
legal bureaucracy and necessary compliance manpower alone. When you
factor in the Food and Drug Administration (FDA) rules on development,
testing, efficacy, and certification of a new drug, costs reach the
billions. Save the semiconductor technology industry, pharmaceutical
companies spend the highest percentage of revenues on research development of any industry, at an average of 17%. It takes an average of 12 years
and $4 billion to bring a new drug to market, with many costing more
than $10 billion. Regulations and the associated bureaucracy directly
contribute to these ballooning costs, and by extension, add to the final
market price of a drug. It remains unclear if these higher costs and
regulations provide any benefits to patient care or reducing the risk of
a bad drug.
Beyond the effect regulations have on manufacturing costs and sale
prices, they also create perverse incentives that limit consumer choice
and delay innovation. By raising the cost of developing a new drug,
regulations incentivize manufacturers to focus on developing drugs that
will bring them the most bang for buck (a higher margin). Companies have
little reason to focus on producing a drug that, while lifesaving or
contributory to widespread wellbeing, has smaller margins. Think of it
like what happened with airlines. In the time of the Civil Aeronautics
Board (CAB), when airlines were regulated much the same way drug
companies are today, airlines had little incentive to make economy
seating. The cost of flying was out of reach for all but the wealthy.
With the dissolution of the CAB and price controls, airlines could
profitably have both premium and economy seating. In effect, the higher
margins on premium seats subsidize the less profitable economy seats,
allowing them to offer economy seats at prices almost anyone can afford.
The sad irony in Washington’s latest crusade against rising drug
prices is that the bulk of the proposals are targeted at the
consequences of previous regulations. Ayn Rand once said, “we can ignore
reality, but we cannot ignore the consequences of reality.” She very
presciently wrote in Atlas Shrugged of a future where, when
regulations on businesses produced undesirable, unintended consequences,
government passed more laws simply banning those unintended
consequences. We can actively watch this sad game play out in New York
City. Their new $15 per hour minimum wage is forcing businesses into the
tight spot of laying off some workers to fund the higher wages for
others. The situation even reached The New York Times, which reported fast food workers now face “unfair” firings. But these firings aren’t unfair or arbitrary – “they are the predictable consequence of a binding minimum wage in a competitive labor market.”
Rather than reexamining the efficacy (or lack thereof) of a $15/hr
minimum wage in making workers better off, the city is pursuing new
regulations to “protect” workers from being fired (read: ban businesses
from laying off unprofitable employees).
Fundamentally, regulations beget more regulations. If lawmakers are
truly concerned with out of control drug prices, it isn’t price controls
or fines on businesses that will lower them—it is a fundamental reform
in the way we are currently regulating pharmaceutical companies."
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.