Guest AuthorThe rising expense of pharmaceuticals is expected to put extra pressure on Florida’s budget next year, with the Department of Corrections, worker health insurance plans, and Medicaid shouldering most of the burden. New specialty drugs in particular are fanning the budgetary flames, such as Sovaldi and Harvoni: $1,000 pills that cure Hepatitis C. Many observers see the waves of innovation that U.S. labs are churning out as representing a double-edged sword: New medicines will save lives, but kill budgets.
Cue the populist agitators, because these are the conditions that give rise to price regulation schemes. Lawmakers, however, should steer clear of the market meddling that, historically, solves nothing and complicates everything. Governments, despite any high-minded intentions given, have little power to curtail the costs of bringing medicines to market.
Sure, with regulatory power, bureaucrats can step in and dictate who gets pills, when and how much they receive, and at what price. But this approach destroys the personal decision-making power of consumers and the motivation for companies to produce according to their demands. It also weakens the natural role that prices take in the creation and allocation of goods, such as prescription pills, in society. Bureaucrats have yet to demonstrate that they can manage the quality and quantities of goods distributed to the public more efficiently than the free market. Plus, centralization adds a new layer of administrative costs to the mix, which detracts from the original purpose of increasing affordability.
Then there’s the financial power of governments. Yes, they can buy up pills and resell at lower prices to the masses, or even plunge millions directly into research and development to defray private pharmaceutical budgets. But public entities do not have their own resources, only tax dollars. Both of these schemes not only drive up those same administrative costs, but they cause the taxpayer to be double-charged – first, on the investment side, then on the retail side.
One positive step that can be taken in tackling this medical double-edged sword is letting prices naturally gravitate to their appropriate levels. Many emerging drugs are being attacked as “too high” in price. Presidential candidate Hillary Clinton has even accused pharmaceutical companies, such as Sovaldi-maker Gilead Sciences Inc., of price-gouging. This is just populist rankling, though. In reality, there is no rulebook on the pricing of innovative medicines.
Who says $84,000 for twelve weeks of life-saving treatment is too high? Billions of dollars, countless years of research, and costly failed clinical trials go into drug discovery. Then when something works, more money is sunk into the government approval process, patent licensing, and marketing for the product. Prices on the retail end must be high enough to cover those costs, curry favor with investors, and produce gains that can be applied toward future research and discovery.
Human beings will simply not risk the time and money required to bring drugs to market if there are not sufficient gains at the end of the line. Price controls would weaken such incentive to create. Medicines, and their availability, are threatened most when they’re never produced in the first place.
There are indeed swaths of consumers who cannot immediately afford $7,000 per week Sovaldi treatments. Individual abilities to afford, however, are mutually exclusive from whether a good is being priced correctly on the whole. It is the aggregate response from the marketplace that will direct companies such as Gilead and Turing Pharmaceuticals in pricing decisions. If demand doesn’t support $1,000 pills, then the price will drop naturally, with zero government interference.
Lawmakers concerned with affordability should let the economic past guide them. Historically, many medicines come out of the gate as pricey, only to be moderated over time by competition, generic equivalents, and private sector sharing dynamics. AIDS vaccines of the 1980s experienced that very evolution.
Politicians have a long history of arbitrarily anointing select goods and services as being above economic laws. This is commonly seen with goods, such as medications, that are linked to human survival. Housing is a useful parallel. New York City is notorious for attempting to be social heroes with rent control, but access to housing by the poor has not improved since those price controls took hold in the 1960s.
Whether it’s housing or medicine, governmental tinkering, despite grand intentions, takes a match to expanded market access because it distorts rational private sector decision making. Lawmakers hoping to solve the budget-busting pill conundrum will do best by doing little.
Sarah Maricle Ayers has bachelor’s degree in economics from Florida State University, and an MBA from FSU. Her op-eds on economic issues have been published in Florida newspapers. Column courtesy of Context Florida.
