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Pharmaceutical Price Controls

Definition & Purpose

Price controls on pharmaceutical drugs is an initiative in which a government body, federal or state, applies a cap on how much certain pharmaceutical drugs may cost. Pharmaceutical drugs are specifically prescription medications developed by private companies, leaving the manufacturing with a monopoly over the product and its price. Proponents argue price controls would prevent pharmaceutical companies from making their medications, which are in some cases life-saving, exorbitantly expensive. In this way, proponents hope to make necessary drugs more accessible and affordable to those who need them. 

Sources: The National Bureau of Economic Research 

A Brief History

Price controls on pharmaceutical drugs are enforced by the federal governments of other countries, including France and the United Kingdom. Several bills proposing the institution of price controls on pharmaceutical drugs by the U.S. federal government, including one introduced by House Speaker Nancy Pelosi in October. U.S. legislation has never passed any bills on the topic into law. 

Sources: Commonwealth Fund

Controversy

For Price Controls

Makes pharmaceutical drugs more affordable

Decreases federal spending

  • According to the American Hospital Association, 19 percent of all Medicare spending is for drugs, and state Medicaid directors identify the high cost of pharmaceuticals, including specialty drugs, as putting growing pressure on their budgets.

According to the Center for Economic Policy and Research, the cumulative savings of these negations to the federal government over the next decade, in a low saving case, would be $229.7 billion. In addition, the savings to state governments would be $30.8 billion, while beneficiaries would save $47.7 billion in lower premiums. In the high saving case, the savings to the federal government over the next decade would be $541.3 billion. The saving to the states would be $72.7 billion, and beneficiaries would save $112.4 billion.

Against Price Controls

Decreases Production of Pharmaceutical Drugs

  • Low prices induce drug makers to exit various markets, or at least to reallocate their manufacturing capacity toward more profitable, patented pharmaceuticals. Low prices also tend to eliminate the rationale for investments in better manufacturing technologies and processes, as shown in a 2009 study published in the Journal of Management Science.

Reduces quality of drugs

  • According to the National Bureau of Economic Research, declines in the number and innovativeness of new drugs, in turn, lead to decreased longevity and higher expenditures on other forms of medical care. Price regulation also delays drug launches, distorts consumers’ choices toward less innovative drugs, and in some cases actually leads to increases in prices. 
  • Forum for Health Economics & Policy stated that the savings of federal price controls for the consumer is outweighed by the loss in life expectancy. After accounting for innovation spillovers, price control reduces the number of new drug introductions by as much as 25 percent relative to the status quo. As a result, life expectancy for the cohort born in 1991–1995 could be reduced by almost two years relative to the status quo. 

Reduces Research and development

  • Jim Greenwood explains for the New York Times in 2015 that the reason that the cost for American pharmaceuticals is so high is because companies need the security to justify research and development of new, groundbreaking drugs. If one lower companies profit margins, it becomes harder for them to justify the risk of research and development, and thus the overall impact on the patient is negative as fewer drugs helpful to patients are developed

Decreases production of generic drugs

According to the Association for Accessible Medicines, 90 percent of medicinal drug use are generic drugs.

Recent Events & Reformation

Public Opinion of Price Controls 

According to a Henry J Kasner Family Foundation survey, 79 percent of Americans believe the price of pharmaceuticals is unreasonable. The same survey found 86 percent of respondents favored allowing the government to negotiate with drug companies to get lower prices.

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