LARSON: Drug Price Caps Can Actually Kill You


The following article is sponsored by and authored by Sven R Larson, Ph.D.

Regardless of who is sworn in as president on January 20, some things will not change. We know, for example, that government will try to extend its control over our health care system.

The latest idea is price regulations on pharmaceuticals. This is an issue where Trump and Biden are very much in agreement.

On September 13, President Trump issued an Executive Order to align U.S. prescription drug prices with those of other countries. American consumers should not pay more than they do in what the Executive Order described as “most favored nations.”

Joe Biden, in turn, wants to “create an independent commission to oversee and regulate” prescription-drug prices. In other words, there is not much more than a mail-in ballot’s distance between Trump and Biden on this issue.

On the face of it, price control rings of compassion and care. The idea is that those who consume the product should always be able to afford it.

In reality, that is not how it works. The effects of price controls are often the very opposite. In a way, they are like a microcosm of what central economic planning does to an economy.

Price controls are promises by government; promises that it can’t deliver on. You have the right to buy a prescription drug at a certain price, but that does not mean you can actually buy the drug.

To see how this works in reality, let us take a step away from today’s heated political landscape. There is a lesson to be learned about price controls from 20 years ago. Back then, California had its first run-in with electricity brown-outs. The politicians in Sacramento had come up with a politically convenient but economically disastrous idea for how to both have, and not have, a free market for electricity.

In the words of John Sweeney, professor of management at Stanford University, the state of California wanted to have a free market for electricity at the wholesale level but “had fixed sales prices for the investor-owned utilities at the retail level”.

The outcome was predictable. Producers of electricity had to pay their bills when their costs varied with the ebb and flow of the markets. That part was perfectly reasonable. What was not reasonable — far from it — was that they were prohibited from properly pricing electricity at the other end.

Needless to say, they could not guarantee reliable supply of electricity.

Price controls on prescription drugs will work the exact same way, but with even more serious consequences. The pharmaceutical equivalent of the California brown-out experience literally costs lives.

The cap also dictates how much a health care provider is allowed to pay for a medicine: if a new drug is too expensive, the provider will not allow its patients to get it. Nowhere is this more evident than in Sweden. In my book Remaking America I give examples of how these price caps ration the supply of medicine, causing the Swedish health-care system to deny treatment for patients with serious medical conditions.

A 20-year-old man with Hunter’s Disease, a rare but deadly metabolic condition, could be saved by a new medicine, but the Karolinska Hospital in Stockholm refused to pay for it. Thanks to politically dictated price caps, the hospital would not prescribe the medicine.

A man in Gothenburg who suffers from multiple sclerosis would be significantly better if he were allowed to replace his current medicine with a new drug. The problem was that the new drug was too expensive to fit under the price cap, so the health administration in Gothenburg denied him access to it.

He even offered to pay the difference — the new drug being one third more expensive — but was still refused, on the grounds that it would be “unfair” to allow some patients to circumvent the drug price caps.

Some European countries add tax-paid subsidies in an effort to ease the rationing effects of the price caps. This does not solve the problem. In Greece, for example, a budget deficit was all it took for the combo of price caps and subsidies to break down.

In 2012, the Greek government was dealing with a fiscal crisis. While raising taxes in every cardinal direction, it also tried desperately to stem its runaway spending. One of its urgent cost cuts targeted prescription-drug subsidy payments. The consequences were immediate. On May 31, 2012, Reuters reported that pharmacies were asking patients to pay the full cost of prescription drugs — or get no drugs at all. The pharmacies, like the wholesale electricity suppliers in California, were barred from operating like businesses in a free market.

If economic history has taught us anything, it is to always trust the free market. Yes, prescription drug prices can be high, but there is no better way to keep them affordable than to let competition, entrepreneurship, and consumer choice work. The nice thing with the free market is that it rewards those who do more with less. When entrepreneurs are allowed to innovative and find ways to bring better products to consumers at lower prices, everyone wins.

Sven R Larson, Ph.D., is a political economist and author. He has worked for free-market think tanks for 15 years and is the author of several books, including “The Rise of Big Government” about the Swedish roots of the American welfare state. His new book “Socialism or Democracy: The Fateful Question for 2024” will be published this winter.


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