FreedomWorks’ activist-chosen dumpster fire of the month for May 2019 is the Transparent Drug Pricing Act, S. 977. Introduced by Rep. Rick Scott (R-FL), this is yet another proposal targeted at reducing prescription drug prices in America based on the faulty logic of international price controls. Among other substantive changes to public health regulations, S. 977 would mandate that U.S. prescription drug prices “may not exceed the lowest retail list price for the drug among Canada, France, the United Kingdom, Japan, or Germany.”
While most Americans can agree that rising prescription drug prices in America are cause for major concern, tying prices in America directly to foreign markets flies directly in the face of basic economics. One of the fundamental principles of the free-market is that demand should drive supply and vice versa. With price controls, government regulation controls both. Moreover, since S. 977 mandates that we set our prices at the lowest price internationally, our entire pricing model will be based on markets that look very different from our own.
Take Japan, for example. The fact that Japan’s population is aging rapidly and becoming more lopsided each week is not a novel observation. This means that per capita demand for geriatric drugs is much higher in Japan than in the United States and thus supply is much higher to meet the demand. Basically, because there are more people who need geriatric drugs in Japan, the cost of those drugs will be lower than it would elsewhere.
If the United States were to base its drug pricing on foreign countries, then our prices will no longer be determined by supply and demand in America but by the supply and demand in countries that are demographically distinct from our own. Rather than let our free market determine price points, S. 977 would set our prescription drug prices based on foreign markets that may or may not reflect or benefit the on-the-ground reality for American citizens who are buying these pharmaceuticals.
What’s more, S. 977 fails to account for the fact that each of the aforementioned countries are themselves struggling with drug pricing issues. Just last year the United Kingdom completely overhauled their prescription pricing system, instituting what is known as the Voluntary Scheme for Branded Medicines Pricing and Access (VSBMPA). The details of the VSBMPA, and its predecessor the Pharmaceutical Price Regulation Scheme, are not particularly important for us as Americans. The United Kingdom has every right to implement any healthcare policy they deem fit.
However, the total overhaul of the UK’s drug pricing model demonstrates how tying American drug prices to foreign markets ultimately makes American drug prices controlled by foreign governments. American voters have no say in electing those foreign governments. It is regulation without representation, plainly and simply. Should one of the aforementioned countries decide to further socialize or even nationalize the pharmaceutical industry, American drug manufacturers and retailers could end up being forced to sell their products at a loss.
Not only is such policy anti-democratic, but it’s also bad economics. The pharmaceutical industry is a massively expensive venture. Part of the reason that prescription drug prices are so high is that the regulatory burden placed on pharmaceutical companies makes research and development of new drugs incredibly expensive. According to a 2016 article in the Journal of Health and Economics estimated that the cost of bringing one new pharmaceutical compound from nothing to market is $1.395 Billion with total capitalized costs rising “at an annual rate of 8.5% above general price inflation.”
In any other industry, after spending billions of dollars developing a new product, it is left up to the producer to determine the market price. They calculate this very carefully, making sure the price is high enough to ensure maximum return on investment while it is also low enough that consumers aren’t turned away by price point. Ultimately, it is a business and if we want that industry that innovates new products then it is essential that we let those businesses charge a premium for their products.
There is no such thing as idle capital. Every dollar that a pharmaceutical company makes in some way spurs innovation. By tying American drug prices to foreign markets we would be severely hampering the ability of American drug companies to innovate and find new solutions to very old problems. Though we must pay close attention to rising drug prices as they impact patients, it is just as important that we not hamstring innovation in the process. That is why S. 977 is our Dumpster Fire Bill of the Month for June 2019.