Should Policymakers Trust The Free Market To Meet Urgent Demand For Prescription Drugs?
A coalition comprising roughly 22 U.S. states from the Pacific Northwest to New England has been organized to "bring about fair prescription prices" for people who do not qualify for Medicaid rates. The states are looking for inspiration from Vermont, Maine and New Hampshire, which are in the process of aggressive legislation aimed at explicit price regulation for the benefit of a segment of the voters saddled with out-of-pocket prescription expenditures.
To "extend lower drug prices to people who are ineligible for Medicaid," Maine, in particular, has been extracting discounts from drugmakers by threatening to cap their prices.
The euphemisms for this elaborate wealth-distributing scheme run the gamut from "fair prices" to "discounts" to "rebates." Some representatives even claim that they simply are asserting and experimenting with states' rights. Never one to complain about devolution of powers from Washington to the states, I somehow have a hard time seeing how the doctrine of states' rights extends to using the force of the law to plunder the property of individuals from the pharmaceutical sector.
On the federal level, Tommy Thompson, the secretary of Health and Human Services (HHS), has been setting the pace as far as strong-arming the pharmaceutical industry and tinkering with the economy. Thompson threatened to bust the patent for the anthrax-fighting drug, Cipro, if Bayer AG did not lower its price for its most powerful customer, the U.S. government. The Bayer monopoly price of $4.67 per Cipro pill remains unchallenged. In the absence of generic competition, the product's high price has not forced a voluntary market adjustment on the seller. Bayer's typical rate for the government is $1.77 per pill, and Thompson knocked that price down to 95 cents a tablet.
Thompson's tinkering is intended to bolster the national pharmaceutical emergency stockpiles. The states, for their part, are busy robbing Peter to pay at least 13 million voting Pauls who demand a discount on medication. Tendentious interventionists will depict Thompson and the states as laboring to correct the wayward free market. The truth, very plainly, is that where there is an alleged "market failure," it is safe to say that it is because of government incursion into the economy. The energetic price-fixing and stockpiling from our bureaucrats are ad hoc responses, not to a market deficiency but to deficiencies brought about by ongoing policies of intervention in the economy. Behind the scarcity - or exorbitant prices of drugs - is the regulator's heavy hand.
The Cipro addle illustrates the point. The government has been asking Americans not to stockpile the medication but to rely on the government's calculus of probabilities: If the crunch comes, the government promises to be able to treat 12 million people for 60 days of incubation. And never mind that the market has cheaper alternatives.
Only in a command economy does government dictate when the demand for a good has been sated. In a free market, consumers direct supply and demand. And in a free market, increased demand leads to increased supply, as producers compete with one another to satisfy buyers. When the demand for Cipro or any other drug has approximated its supply, buyers - not the government - will have indicated their needs have been satisfied. If every single paying American wishes to store a smallpox vaccine or secure a course of Cipro, if only as a psychological antidote, why not? The recent disastrous events have made this particular resource scarcer at the current price because, among other reasons, more people are bidding for Cipro. But even so, Bayer's promise to triple the production of Cipro - cranking out 200 million tablets during the next three months - may do little to satisfy a demand driven by almost that many Americans. This is because we do not have an unhampered market.
How would consumer demand have been heeded had the market not been hampered? The same events that hitherto have occurred would have unfolded; the sudden urgent demand for the drug would have been followed by a shortfall of supply. Large demand and short supply initially would send the price of Cipro or any other drug rocketing. At this stage, demonstrators would take to the streets, riding the same old ass and hollering, "Profits equal plunder." Our bellicose collectivists never understand that our very lives depend on the ability of the manufacturer to read and act on vital market signals. Surging profits in an unhampered pharmaceutical market would signal to the many drugmakers that it's time to enter into Cipro production.
All these processes have transpired, save one: Drugmakers are not permitted to respond to one of the street signs of the free market - profits. Patent law prohibits pharmaceutical companies from competing for Cipro market share, and in the process of satisfying the buyer's demand for it, also creating competition and dealing a blow to the Bayer monopoly price tag.
Whether one thinks that granting to an inventor a near 20-year monopoly on the manufacture, use or sale of a product is the right thing to do is quite apart from acceding that a patent places a barrier on entry into the market. This barrier is the essence of monopoly. Capturing a large market share by pleasing consumers does not a monopolist make. But obtaining from government a grant of privilege that gives the profit seeker the legal power to restrict access into the market, so that he is undeterred by competition, qualifies.
Any coherent explanation for the shortages or elevated prices of certain drugs must proceed from the understanding that patents allow the manufacturer to create a scarcity of the product by restricting its supply in order to raise the price. As the actions of Thompson and his compatriots at the state level demonstrate, the reality of government-created shortages is ameliorated either by government fiat or, in this instance, if Bayer relents and licenses the drug to generic manufacturers. Granted, Food and Drug Administration (FDA) regulations play a role in limiting our choices and restricting competition in the market. Getting a new drug approved today costs about $500 million and takes approximately 10 years. The sclerotic FDA does not, however, explain why, once a shortage has occurred in an already-approved drug, the self-regulating market mechanisms cannot kick in to overcome the scarcity. Patents explain this.
The Centers for Disease Control and Prevention have expanded the range of anthrax prophylactics to include doxycycline and others. The pressure has been somewhat lifted off Cipro as the first-line agent of choice in treating anthrax. It would, however, be a mistake to consider the case of Cipro a mere fluke; it's a harbinger of things to come. "Public health" is not safe so long as companies receive from government a protracted monopoly on the manufacture, use or sale of a product.
The immediate upshot of government stockpiling of these compounds is to make them less available to the ordinary person and to increase prices throughout the drug market. Subsidized government programs themselves spur "a significant purchasing of drugs," confirms the Canada-based Fraser Institute, and "can increase prices in the rest of the market." Drug manufacturers respond to the fixing of prices by government by recovering their legitimate or alleged costs from nongovernment buyers. And wouldn't you know it: The not-quite-invisible hand of government is implicated in the very prescription-drug prices the states now are attempting to "fix."
Discussion of prohibitive prescription costs is a perennial cue for the media (including a 1999 CBS 60 Minutes segment) to dust off some American seniors and follow them en route from Maine into Canada to fill their life-saving prescriptions. The story's claim: Victimized by the "pharma-villains," the only way many American seniors can get affordable, life-saving medication is this pilgrimage to Canada, where price controls are hale and hearty.
Ironically, the trek to Canada is unnecessary. American seniors can get similar gains by "bargain hunting" at home, according to researchers at the Fraser Institute. Still, prescription-drug prices generally are lower in Canada than in the United States. Simple ignorance of consumers partly explains the rush to adopt Canadian-style regulation of drug prices in states such as Maine, Vermont and others.
With Canada's declining standard of living, a depreciating dollar and poor productivity, little wonder Canada has been called an honorary member of the First World. Average prescription-drug prices are indeed lower in Canada, but then again goods and services are generally cheaper in poor countries. "Low drug prices reflect Canada's low standards of living," explains the Fraser Institute's John R. Graham. "They are the marketing response of the pharmaceutical companies to declining incomes." Manufacturers will adjust prices to keep selling in a poorer country.
Big government is in vogue. A bureaucracy that is enjoying a popularity windfall is on the verge of convincing Americans a Canada-style price-control regime is in their best interests. If Americans wish to emulate Canada's Patented Medicines Prices Review Board, let them be forewarned that, in Canada, the board ensures that price increases follow a complex guideline in which supply and demand has no role. The immediate effects of Canada-style price controls in the United States will be high prices for generic and older patented drugs and little competitiveness in the price of innovative drugs.
Because price controls quash the ability of the manufacturer to increase his prices in response to high demand, price controls also sever the link between buyer and manufacturer. This translates into the manufacturer's inability to give us what we want. Are Americans ready, like their flaccid Canadian neighbors, to allow government to dictate their needs?
In the long run, price controls will create the incentive to overconsume. For drug manufacturers, price controls will reduce the incentive to invent, meaning fewer breakthrough drugs for patients. The prognosis: a spiral of demand and a diminishing supply, to say nothing of less flexibility to deal with crisis situations.
We have come full circle back to the free market.
©2001 By Ilana Mercer