Foreign Drug Price Controls: Bad for Patients, Bad for Taxpayers

Economists' Letter: Stop Foreign Drug Price ControlsSolutions To the ProblemWhy Foreign Importation Is Not the Answer

History has shown that price controls on any commodity produce unintended but consistently detrimental effects. Despite this, the Department of Health and Human Services is considering a scheme to set some Medicare drug prices using an international index. That’s why leading economists have signed a joint letter warning the Administration about this flawed proposal.

Imported price controls are a prescription for failure.

More than 150 economists have written an open letter to the Department of Health and Human Services, telling them to reject foreign price controls:

We write to express concerns about a proposal that would adopt an international price model index to establish drug prices under portions of the Medicare program. Such a system would reference drug prices set by selected foreign governments to determine the maximum price at which a particular drug could be sold under Medicare.
 
Implementing a reference pricing system in the United States would create price controls that bring with them the same types of harms these policies have caused in foreign countries, to the detriment of the health care system at large and investments in U.S. research and development. History has shown that price controls on any commodity or service produce unintended but consistently detrimental effects.
 
In general, setting price controls at below-market rates leads to shortages, squeezes the cost bubble toward some other portion of the economy, and imposes a deadweight cost on society. In this case, price controls can lead to a reduction in patient access to certain drugs, less investment in the research and development of new drugs, and cost-shifting that raises the prices of other therapeutics. Ultimately, patients will suffer as cures are delayed or entirely undeveloped, while taxpayers will be denied potential savings from drugs that could obviate more expensive treatments in government healthcare programs, and the investment of capital in development of new medicines.
 
Policymakers looking to reform drug pricing models should reject price controls and instead pursue alternative market-based approaches that would lower prices, expand access, and encourage more innovation. 

Click here to view the full letter, signed by more than 150 economists, in opposition to HHS’s proposal.

In a new issue brief, National Taxpayers Union President Pete Sepp lays out the right way to combat these problems. Streamlining FDA approval processes, repealing unnecessary regulations, enhancement of oversight over government administration of health programs, and other solutions all have a role to play. As Sepp writes,

Value-based health care has more potential than any other model for delivering what free-market public policy advocates have long sought: stronger patient-provider relationships, consumers empowered with decision-making over how to deploy resources, limited government interference in the evolution of services, and nimble programs capable of embracing evidence-based results... This will foster an organic fiscal responsibility that is far more durable than complex rules, price controls, or rationing.

A 2016 policy paper from the National Taxpayers Union examined how the U.S. got into this problem, finding that these kinds of price controls are "a big government response aimed at addressing an outcome that big government created in the first place. The way out of this trap is with genuine solutions that empower individuals, providers and innovators to reshape health care.”

Click here for the full NTU policy analysis, Trading in Trouble: How Drug Importation Undermines Free-Trade Principles and Harms Taxpayers.