Tuesday, November 10, 2015

More Government Regulation Is Not a Solution for Lowering Prescription Drug Prices

Daraprim is a drug that not only helps with curing toxoplasmosis, but is also part of a pharmaceutical regimen to help deal with AIDS. This past August, the rights to sell Daraprim were sold to Turing Pharmaceuticals. Upon purchasing the rights, Martin Shkreli, who is the CEO of Turing, decided to jack up the prices 5,000 percent from $13.50/pill to $750/pill.

What allowed him to get away with "price gouging" is not the free market, but the Food and Drug Administration's (FDA) drug importation laws. India has a cheap alternative, but FDA laws prohibit it from being imported to the United States. Combine that with the FDA's expensive and time-consuming process of acquiring approval to produce Daraprim in the United States, and you have another example of government regulation gone awry. Fortunately, Imprimis Pharmaceuticals was able to bypass the regulations and create and alternative pill that only cost about $1.

The story behind Daraprim leads us to asking the bigger question of how to make sure that prescription drug prices aren't so exorbitant that it runs Americans into financial ruin. While generic drugs have saved more than a trillion dollars from 1999 to 2010, we have seen an uptick in brand prescription drug pricing. What is interesting is that when you look at the cost of generic prescription prices according to the Express Scripts Prescription Prices Index, generics have dropped by nearly two-third since 2008 (see below).

One of the most popular policy recommendations, according to a Kaiser Family Foundation survey, is to have Medicare negotiate with drug companies for lower prices. In response to Shkreli's actions, Hillary Clinton vowed to fight to "price gouging", in which the biotech sector of the stock market responded with a 6 percent decrease in value. What should be done to mitigate the cost of prescription drugs?

In September, the Left-leaning Center for American Progress (CAP) released a report on prescription drug-related reforms. The free-market-oriented National Center for Policy Analysis (NCPA) also released a two-part report around the same time as CAP (see here and here). Both reports can be viewed for further details, but I would like to briefly go through some preliminary reactions of mine, mainly those of "price gouging" and backlogs.

Clinton has already proposed putting a price cap on patients' drug costs. Aside from the fact that there isn't "price gouging," price controls have adverse, unintended consequences (see here, here, here, and here). According to a study from the centrist Rand Corporation, such stringent price controls [from the FDA] cause a slight decrease in life expectancy. Research from Stanford University and the National Bureau of Economic Research also shows that FDA regulation dampens innovation in the pharmaceutical sector.

As already has been alluded to, the FDA approval process has played a role in keeping innovation from taking place. The Healthcare Supply Chain Association (HSCA) wrote the FDA a letter back in June saying that it should deal with its backlog of 3,000 applications and fast-track potential generic drugs. Clinical drug trials are lengthy, which is why conditional approval pending Phase II testing wouldn't be a bad policy reform. Removing patent monopolies would be another great policy since monopolies cause price increases.

We can get into such industry trends as market consolidation, group purchasing organizations, raw material shortages (e.g., 27% of drug shortages are caused by raw material shortages), but what we see is another example of government regulation and rent-seeking creating a monopoly for something that would have cost pennies in a competitive market. While many of the issues facing the pharmaceutical industry are regulatory and legal in nature, there are still other issues with supply shortages and price increases. While the conversation can be extended, much like it is in the aforementioned reports from the CAP and NCPA, the general solution in this case is market liberalization on the supply-side.

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