By John McClaughry
President Joe Biden has signed into law the Schumer-Manchin “Inflation Reduction” bill. Among its many provisions is the long-sought (by Democrats) authorization for the federal government to “negotiate prices” of pharmaceutical products purchased through Medicare.
The bill requires the Health and Human Services secretary to “negotiate” prices for 10 of the top-spending drugs in Medicare starting next year and 20 by the end of the decade. If drug makers don’t accept the government’s offered price, they would get slapped with a 95% excise tax on their sales.
As Kim Strassel of the Wall Street Journal writes, “That’s not a ‘negotiation’; it’s a gun to the head. The proper term is “price controls.”
The indisputable fact is that government enforced price controls on any product triggers a long chain of consequences, predictable by historians and economists. The unhappy results of government price controls is known, at least to some critics, as “the Curse of Diocletian.”
Diocletian was emperor of Rome from 284 to 305 AD. Previous emperors had seriously debased the value of the silver currency. Diocletian, needing money to pay the legions and build grandiose public works, started over.
He scrapped the old currency and introduced a new copper coin that quickly became worth essentially nothing. Prices of goods and services in the new coinage shot upwards, so Diocletian issued an edict declaring the mandated value of practically every traded product or service in terms of his worthless coinage. It prohibited buyers and sellers from making their own decisions about how much to pay for wool, wheat, drovers and farriers. It declared that anyone caught refusing to accept controlled prices of goods and services would be put to death.
Not surprisingly, the result was marketplace riots, killing of traders, hoarding, shortages, unemployment, hunger, and in spite of the death penalty, a rapidly growing black market. After four tumultuous years the price control system collapsed. Diocletian became the first Roman emperor forced to abdicate.
Today, pharmaceutical pricing is an almost impenetrable jungle of discounts, rebates, copays, special deals and the like. What we do know is that price controls of Medicare-prescribed drugs will lower the prices of the affected drugs — but they will raise the prices of drugs in the larger uncontrolled private sector market, drive up the costs of health insurance premiums, and depress industry investment in new life-saving drugs.
The Wall Street Journal also reported that “Progressives are disappointed with the tentative drug-pricing deal that Senate Majority Leader Chuck Schumer appears to have struck with West Virginia’s Joe Manchin. But no worries, says (outgoing) Vermont Rep. Peter Welch, the price controls are merely the start of what will be a long raid on drug makers to fund Democratic spending ambitions.”
In short, that long raid on drug makers will make the pharmaceutical industry completely dependent on the government for its viability, let alone shareholder returns. There’s a name for such an economic system, where the government mandates what products an industry must make, and fixes what prices the industry can charge for its products. It’s not socialism, where the government owns the industry; It’s fascism.
Is there some better way for patients to obtain pharmaceuticals at lower cost? Patients should shop for the best drug prices themselves, and pay for them directly from their tax-free health savings accounts, subsidized for lower income families. Two online vendors are GoodRx and Mark Cuban’s Cost Plus Drugs, that offer most prescription drugs at 15% above manufacturer’s cost.
Patients can enroll in Direct Primary Care, such as Atlas MD based in Wichita, Kansas. AtlasMD offers 24/7 primary care for the most common medical problems via phone, email, Skype, Zoom and Facebook. Patients must buy high-deductible low-cost health insurance to cover serious medical issues, but AtlasMD sets up specialist appointments, and provides drugs (from GoodRx) and arranges tests and MRI scans at discounted prices. AtlasMD charges $50 a month for a mother and $10 for a child.
Another alternative is to join an association health plan or a faith-based health cost sharing society. Prescriptions can be filled and imported from countries like Canada and Ireland for personal use at much lower prices than the same drugs sold in the US (because US patients are shouldering the enormous cost of FDA approval here).
Congress needs to help by allowing seniors to contribute to health savings accounts. Other needed reforms are rewriting the intricate medical patent laws to eliminate ingenious abuses, freeing generic drug manufacturers from unreasonable obstacles, and dropping the cost-inflating 1962 “efficacy” requirement for gaining FDA approval of a new drug, that now costs more than $2 billion.
Diocletian is long gone, and the lingering curse of his price controls needs to be similarly interred.
John McClaughry is vice president of the Ethan Allen Institute.