The pharmaceutical industry spends billions of dollars each year on the research and development of new products. Innovative prescription drugs have made a profound impact on the lives of millions, curing illnesses and lengthening and improving quality of life. These advances were made not through any government mandate, but through the free market.
While drug companies have argued for many years their prices are competitive and determined by the cost of development, critics say new laws are needed that would set the price of prescription drugs at “fair” rates. These critics say this form of market manipulation is necessary to guarantee access to pharmaceutical drugs for all people. In response to these criticisms, Massachusetts is now considering becoming the first state to impose a cap on prescription drug prices.
The proposal in Massachusetts would authorize the state Health Policy Commission (HPC) to cap prescription drug prices sold in the state for pharmaceutical drugs HPC determines to be “critical” drugs with “significantly high” costs. According to Jeffrey W. Mittleman and Kristin M. Cleary of law firm Holland and Knight, the bill determines which drugs are critical by examining their cost to state run health care programs, current in-state cost, the overall rate of use in Massachusetts, and the cost impact the drug’s price will have on the state health care growth benchmark, which is currently set at 3.6 percent.
The bill also would establish new reporting requirements for drug manufacturers of these critical drugs. Manufacturers would be required to submit data on the cost of production, research and development costs, marketing costs, and the prices charged in other countries and in Massachusetts. Failure to report this data would make the manufacturer subject to fines. If HPC determines the price to be too high, it would be allowed to cap the price the manufacturer can charge for the drug in Massachusetts. This would be determined using the clinical benefits of the drug, the cost to develop the drug, and the prices charged elsewhere.
Placing price caps on prescription drugs is unnecessary and counterproductive. A study from the Pioneer Institute for Public Policy Research by Jim Stergios and Gregory Sullivan found prescription drug spending rose “by less than 1 percent annually in Massachusetts between 2010 and 2013.”
Additionally, David Tuerck, John Barrett, Douglas Giuffre, and Zaur Rzakhanov of the Institute for Policy Innovation argue price controls will have two primary effects in a state: All consumers would have fewer new drugs and therapies, and consumers living in states housing a substantial number of pharmaceutical and biotechnology firms, which is the case in Massachusetts, would be negatively affected by reduced research investment.
One point legislators must remember is a great deal of the costs created during the drug development process is due to existing government regulation. The Pioneer Institute found from discovery to launch, drug development takes about 15 years to complete. This is significantly longer than just a short time ago; development time has increased by 145 percent since 2003.
The study also found the cost of development averaged $2.6 billion in 2014. The high cost of regulatory compliance and the threat of lawsuits creates a disincentive to develop new drugs – unless there is a significant profit incentive. While some of these concerns are addressed through patent policy, removing this motivation through legislation such as the bill being considered in Massachusetts will hurt the pharmaceutical industry and consumers alike. Affordable drug prices won’t matter much if pharmaceutical companies stop producing new products.
Price caps such as the one being proposed in Massachusetts are vague, obtrusive, and give far too much control over the pharmaceutical market to a small government regulator. Price gouging can be a problem, but price controls are not the answer. Instead of killing the free market and innovation in the pharmaceutical industry, state lawmakers should promote transparency and let the market and legal system monitor drug prices.
The following documents provide additional information about the effects of drug price controls.
Ten Principles of Health Care Policy
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and provides proposed reforms to remedy current health care policy problems.
Are Drug Prices Driving Healthcare Cost Growth?
Jim Stergios and Gregory Sullivan examines why “state-level regulatory reactions to short-term increases in drug prices are not supported by the evidence and could produce negative consequences for patients and other purchasers.”
Massachusetts Legislature Advances Bill to Impose Caps on Drug Prices
Jeffrey W. Mittleman and Kristin M. Cleary of law firm Holland and Knight examine a proposal in Massachusetts to cap drug prices in detail.
Regulating Drug Prices: U.S. Policy Alternatives in a Global Context
In this article, the Rand Corporation examines the impact of drug price regulation. According to the Rand authors, “Regulatory approaches that reduce pharmaceutical revenues may generate modest consumer savings in the best cases, but risk much larger costs as decreased innovation leads to reductions in life expectancy.”
Government Regulation of Prescription Drug Pricing
The Academy of Managed Care Pharmacy (AMCP) argues in this article government regulation of prescription drug pricing, regardless of its structure, would have an overall negative impact on consumer cost, quality, and access to health care benefits. “Regulated prices can cause cost‐ shifting to other consumers and may inadvertently discourage appropriate drug prescribing, dispensing and utilization.”
The Impact of Drug Reimportation and Price Controls: The U.S. and Massachusetts
David Tuerck, John Barrett, Douglas Giuffre, and Zaur Rzakhanov of the Institute for Policy Innovation argue in this study price controls, while yielding lower drug prices in the short run, could have a significant negative impact on drug development and innovation, as well as a negative impact on the regional economies in which the pharmaceutical and biotechnology industries play an important role, such as Massachusetts.
The Demonizing of Drug Companies
Prescription drugs and other technological advancements have succeeded in lengthening and improving quality of life. This was only able to occur, however, because of the economic system in which those drugs and that technology were incubated. The Beacon Hill Institute warns lawmakers that although pharmaceutical companies are the perfect political targets, they provide an invaluable service to the world.
Drug Research and Price Controls
Should the U.S. government regulate prescription drug costs, just as many countries around the world have? John Vernon of the University of Pennsylvania considers the pros and cons.
Transparency and Disclosure of Health Costs and Provider Payments: State Actions
This report from the National Conference of State Legislatures describes a number of actions taken by states over the past two decades to promote the advancement of health care price transparency.
Transparency in Health Care: What Consumers Need to Know
In this 2006 presentation hosted by The Heritage Foundation, the Hon. Alex M. Azar II, Thomas P. Miller, David B. Kendall, and Walton Francis discuss the potential of health care price transparency and how it could affect choice and pricing. “In a free market, where consumers make their own decisions, technology and techniques rapidly improve. Quality rises and prices drop. In short, freedom fosters prosperity.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News at http://news.heartland.org/health, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.