When encountering a public problem, people tend to fall into one of two camps: one camp, the larger one, says, “There oughta be a law.” The other one asks, “How has the government created or aggravated the situation?” We know which camp Maestro Trump belongs to.
Take prescription-drug prices. Because Americans pay higher prices on average for prescription drugs under patent (but not for generics) than people in other countries pay, Trump, who used to call price controls “socialist,” has ordered the drug companies “to offer American consumers the most-favored-[developed-]nation lowest price.” He wants private companies to lower their prices at home and raise them abroad.
Is this a command? Trump’s executive order goes on: “should drug manufacturers fail to offer American consumers the most-favored-nation lowest price, my Administration will take additional aggressive action.” We know what that means. “If … significant progress towards most-favored-nation pricing for American patients is not delivered,” his order says, “to the extent consistent with law,… the Secretary [of health and human services] shall propose a rulemaking plan to impose most-favored-nation pricing.” Got that? Impose.
Why did Trump change his mind about price controls? Because now it fits with his demagogic populist politics of national grievance, which has served him so well. He vows to end “global freeloading” by foreigners who pay less. He believes that Americans subsidize foreigners. But do we? Good economics says otherwise. (We’ll get to that.)
The Maestro seems not to realize that price controls have failed for 4,000 years! They bring shortages, reduce innovation, and cause other distortions, which the government then tries to fix by expanding its restrictions. Never mind that the government makes drugs more expensive than they would be in an unhampered market.
Prices will differ from country to country for sensible reasons. Economists call this market segmentation and price discrimination. Some people in certain circumstances are willing and able to pay more than others whose circumstances differ. We see this with airline fares and off-peak movie ticket prices. Americans are richer than other people and can afford to buy things that others couldn’t and wouldn’t buy at American prices. Sure, everyone prefers all prices to be lower—except his own, of course—but does that mean the government could mandate lower prices without negative consequences for all? No.
Once a modern drug is produced and sold in the rich American market at a price high enough to yield a profit and recoup the stratospheric R&D costs, the drug maker can produce additional quantities at a low marginal cost and profitably expand sales to poorer people abroad at a lower price. This is good for the foreign buyers who otherwise wouldn’t have access, but it does not harm Americans: regardless of what others pay, they buy the drug because they think the benefits exceed the cost.
A government decree to make prices more equal would be harmful all around. As economist Alex Tabarrok writes, banning price discrimination “will end up hurting patients in low-income countries while delivering minimal gains to Americans. Worse, by reducing pharmaceutical profits overall, it weakens incentives to develop new drugs. In fact, in the long-run U.S. consumers are better off when poorer countries pay lower prices—just as airline price discrimination makes more routes viable for both economy and first-class passengers.” Likewise, if movie theaters couldn’t price-discriminate, we’d have fewer theaters and less service from surviving theaters because profitably filling seats at off-peak times would not be an option. When the government restricts profits, it restricts supply and innovation.
That we lack a fully free market today does not substantially change the analysis. We can be confident that government intervention makes medical care artificially expensive by imposing artificial costs, restricting supply, and stimulating demand. A ban on global price discrimination would hardly help improve things. We’d have fewer new drugs. (Watch Alex Tabarrok and Robert Murphy discuss this and related issues.)
This case against Trump’s executive order is valid even when we acknowledge that foreign buyers of American drugs are governments that impose price controls. As many have pointed out, importing other countries’ price controls makes no sense.
No discussion of drug prices is complete without noting the burdens imposed by the Food and Drug Administration (FDA) and the patent system. Bringing a drug to market costs upward of $2 billion, and most never make it. Private competitive testing and certification firms (analogous to Consumer Reports) could replace the FDA and the prescription requirement. With informed consent, people should be free to take medicines that have undergone different degrees of testing. Life is risk. The government can’t change that.
Regarding the patent system, while 15-year monopoly pricing to some extent offsets the FDA burden, it should be abolished along with that agency. Because of vigorous competition, Americans pay far less for out-of-patent generic drugs than the rest of the world. Intellectual property is inconsistent with property rights because it prohibits manufacturers from using their own physical property to produce things. Unlike finite physical property, ideas aren’t properly ownable: when an idea is communicated to others, the first person still retains it. Its economic value may fall, but no one has a property right in a thing’s market value. For those who fear that the end of drug patents would spell the end of innovation, see Michele Boldrin and David K. Levine’s Against Intellectual Property, which has a chapter on the international pharmaceutical industry.
Trump’s plan to tamper with drug prices will reduce profits to “Big Pharma”—ooh, what a scary term!—impede innovation, and make everyone less healthy in the future. Drugs currently under patent may seem expensive, but as Tabarrok points out, many modern drugs reduce the need for more costly and dangerous surgeries, and most drugs are paid for through insurance policies. (The government also makes insurance artificially expensive through mandated coverage and discriminatory tax treatment.)
Moreover, as Tabarrok says, Americans get new drugs first. So, all things considered, drug prices don’t look so bad after all. The moral and economic case for freeing the market is watertight, but that doesn’t mean what we have now is worthless and could not become worse with more intervention.
America’s interventionist medical system must be replaced by a free market in medicine. Most of every dollar spent on medical care today is paid for or mandated by the U.S. government. Barack Obama’s Affordable Care Act made a flawed system worse. Coercion, which includes medical licensing, hospital certification, and official accreditation of medical schools, should be eliminated because nothing has proved better at delivering goods and services than the competitive profit-and-loss system directed at consumer satisfaction.
