Tuesday, February 24, 2004
Price controls kill
[James K. Glassman, "Free Riding Isn't Free," Tech Central Station, 23 February 2004.]
At a recent forum on "Price Controls and the Economics of Medical Innovation," James Glassman made some persuasive arguments against price controls for prescription drugs. Put simply, price controls are poor public policy for the U.S., just as they are elsewhere. Rather than importing bad public policy, we should improve our health care system and push for reform in overseas markets.
-Price controls kill. A recent Bain & Co. study compares the U.S. and Germany. Because of price controls on drugs and the inevitable rationing that accompanies such controls, Germans spend more time in the hospital than Americans and lose more working days through sickness. Germans suffering from heart disease and breast cancer have higher mortality rates. There is a triage here. Europe kills its citizens and makes them sicker because it restricts access to drugs it considers too expensive. But just consider these facts: In Germany, 30 percent of diabetes patients are not treated with drugs at all. In France, most patients with multiple sclerosis and eligible for treatment with beta interferon, do not receive such treatment. Only 18 percent of European patients with severe depression get treatment with antidepressants. This is the future for America if price controls are exported to this country.
-The economic development argument is powerful. The Bain study shows that, while Germany saves $19 billion in drug costs through price controls, it loses $22 billion due to reduced R&D spending, bad health outcomes, loss of high value-added jobs (and the tax revenue associated with them), and so on. Free riding isn't free.
-Try to change minds in Europe and Canada. It is their citizens who are suffering now and will suffer far more if importation of price controls succeeds. Also, as John Martin said, private companies need to get tough in their negotiations in Europe and Canada and not accept the low prices imposed on them.
-Repeat with me, "Free Rider. Free Rider. Free Rider." Europeans, Australians and Canadians are doing something immoral. They are not shouldering their responsibility for R&D. In the past ten years, R&D spending in Europe has doubled, but R&D spending in the US has quintupled. As Bain says, free riding can't go on much longer. It is an unsustainable model.
-Americans, ultimately, need to understand a little economics. We shouldn't be shy about educating them. Price controls never work long-term. Why? Because when you set a low price, you reduce supply. Few producers want to make things if the price is artificially low. This reduced supply puts further upward pressure on prices -- increasing the gap between the controlled price and where the natural price would be (where the unfettered supply and demand curves cross). Governments, then, must respond by reducing demand by refusing to allow people to have life-saving or life-enhancing drugs and medical devices. What's remarkable is not that drugs are so expensive, but that they are so cheap. They are a stupefying bargain.
-Make common cause with the rest of innovative industry - now under attack as well. The drug and medical device sector is not alone. Successful businesses are always under fire.
-How to get drug prices even lower? Simple. Increase supply. If Europe ended price controls, more companies would enter the market, pushing down prices. If the FDA streamlined its standards, costs of bringing new drugs to market would fall, increasing supply. If property rights were protected, the cost of capital for investment in new drugs would fall, increasing supply. That is the answer.
For those interested in learning more about Canada's health care system in particular, Dr. Brian Lee Crowley of the Atlantic Institute for Market Studies recently delivered a speech at a Flint Hills event entitled, “The Top Ten Things People Believe About Canadian Health Care, But Shouldn’t.”
[James K. Glassman, "Free Riding Isn't Free," Tech Central Station, 23 February 2004.]
At a recent forum on "Price Controls and the Economics of Medical Innovation," James Glassman made some persuasive arguments against price controls for prescription drugs. Put simply, price controls are poor public policy for the U.S., just as they are elsewhere. Rather than importing bad public policy, we should improve our health care system and push for reform in overseas markets.
-Price controls kill. A recent Bain & Co. study compares the U.S. and Germany. Because of price controls on drugs and the inevitable rationing that accompanies such controls, Germans spend more time in the hospital than Americans and lose more working days through sickness. Germans suffering from heart disease and breast cancer have higher mortality rates. There is a triage here. Europe kills its citizens and makes them sicker because it restricts access to drugs it considers too expensive. But just consider these facts: In Germany, 30 percent of diabetes patients are not treated with drugs at all. In France, most patients with multiple sclerosis and eligible for treatment with beta interferon, do not receive such treatment. Only 18 percent of European patients with severe depression get treatment with antidepressants. This is the future for America if price controls are exported to this country.
-The economic development argument is powerful. The Bain study shows that, while Germany saves $19 billion in drug costs through price controls, it loses $22 billion due to reduced R&D spending, bad health outcomes, loss of high value-added jobs (and the tax revenue associated with them), and so on. Free riding isn't free.
-Try to change minds in Europe and Canada. It is their citizens who are suffering now and will suffer far more if importation of price controls succeeds. Also, as John Martin said, private companies need to get tough in their negotiations in Europe and Canada and not accept the low prices imposed on them.
-Repeat with me, "Free Rider. Free Rider. Free Rider." Europeans, Australians and Canadians are doing something immoral. They are not shouldering their responsibility for R&D. In the past ten years, R&D spending in Europe has doubled, but R&D spending in the US has quintupled. As Bain says, free riding can't go on much longer. It is an unsustainable model.
-Americans, ultimately, need to understand a little economics. We shouldn't be shy about educating them. Price controls never work long-term. Why? Because when you set a low price, you reduce supply. Few producers want to make things if the price is artificially low. This reduced supply puts further upward pressure on prices -- increasing the gap between the controlled price and where the natural price would be (where the unfettered supply and demand curves cross). Governments, then, must respond by reducing demand by refusing to allow people to have life-saving or life-enhancing drugs and medical devices. What's remarkable is not that drugs are so expensive, but that they are so cheap. They are a stupefying bargain.
-Make common cause with the rest of innovative industry - now under attack as well. The drug and medical device sector is not alone. Successful businesses are always under fire.
-How to get drug prices even lower? Simple. Increase supply. If Europe ended price controls, more companies would enter the market, pushing down prices. If the FDA streamlined its standards, costs of bringing new drugs to market would fall, increasing supply. If property rights were protected, the cost of capital for investment in new drugs would fall, increasing supply. That is the answer.
For those interested in learning more about Canada's health care system in particular, Dr. Brian Lee Crowley of the Atlantic Institute for Market Studies recently delivered a speech at a Flint Hills event entitled, “The Top Ten Things People Believe About Canadian Health Care, But Shouldn’t.”
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