Blame Government for High Drug Prices

Hillary Clinton is using a story about a hedge fund manager charging outrageously marked up prices for an AIDS drug as a springboard for her plans impose a new set of mandates on insurance and pharmaceutical companies. The story is upsetting, no doubt, but as usual, progressives miss the root of the problem, and try to treat symptoms rather than curing the disease.

Here is what happened in brief: the drug Daraprim is used for treating parasitic infections that are especially dangerous to people with immune deficiencies, such as those caused by AIDS. The drug has been around for 62 years, but has only recently emerged into the spotlight. While the drug formerly sold for as little as $1 a pill, the rights to the drug have been passed around from company to company, increasing in price with each sale. The latest development, and the one that Clinton has been highlighting, is the purchase by Martin Shkreli, the chief executive of Turing Pharmaceuticals, of the rights to Daraprim for $55 million and promptly jacked up the price to $750 a pill.

It’s easy to see why people are upset by this, and why capitalism will get the blame. Both Hillary Clinton and Bernie Sanders are happy to use the story as an indictment of free markets and an excuse for more regulation. But in fact, excessive regulations are what permit Shkreli and his ilk to get away with such extreme markups in the first place. In a true free market for health care, this sort of thing just wouldn’t happen.

To see why, let’s start with the FDA – the agency responsible for drug approval in the United States. Before a new drug can go to market, the FDA has to sign off on it, a process that entails a considerable investment of both time and money. On average, it takes 12 years and $350 million for a newly developed drug to make it onto pharmacy shelves. The immense cost of regulatory compliance, plus the threat of lawsuits if something doesn’t go right, provides an extreme disincentive for anyone to develop new medications unless they can expect to make major profits. To this end, patents are granted to drug companies to guarantee them exclusive rights to produce their product for a certain period of time, after which generic version are permitted to compete with the brand name.

But Daraprim is 62 years old and no longer protected by a patent, so why are there no competitors for the $750-per-pill monopoly? The answer is that even generics have to go through the FDA approval process, and since Daraprim is a niche product with a small customer base, it makes little sense for a company to invest so much money into competing. There is simply not that much profit to be had once you subtract out the regulatory cost.

Even this would not be such a problem if the United States allowed competition from abroad. Other countries have sick people too, and therefore have their own medications that work just fine. But the FDA is much more picky about which drugs it allows to enter markets than its equivalent agencies in most European countries. Only one out of every 1,000 drugs that enter laboratory testing even make it as far the human testing stage. The FDA also doesn’t accept approval credentials from any regulatory body not called “the FDA,” so importing drugs from other countries requires a duplication of effort on the part of the developers, which many find not worth the trouble. So while there may be a perfectly acceptable (and affordable) competitor to Daraprim in Europe, Americans would never know about it, much less be able to buy it.

High drug prices are a problem that needs to be addressed, and Shkreli is certainly making himself no friends by his apparent gouging of the public, but the solution is not more regulation; it’s less. Existing regulations are what drive up the prices and prevent competition in the first place. Imposing additional constraints on companies is only going to exacerbate the current situation. Making it easier and cheaper to bring drugs to market, as well as allowing the importation safe medicines from other countries would increase supply and lower costs, greatly hampering the ability of even the most ruthless businessman to corner the market on saving lives.

As we’ve seen with ObamaCare, government mandates can’t keep prices down, but competition, innovation, and a free market for medicine may be just what the doctor ordered.