Add this one to the list of legislation that makes people feel good without actually providing much of a benefit. House Speaker Nancy Pelosi (D-CA) recently revealed her plan to lower the cost of prescription drugs. This has been an issue discussed by both Republicans and Democrats in Congress as well as President Donald Trump.
The plan seems to be the typical Democratic solution: more government involvement. But in this case, it appears that the proposal wouldn’t make much a difference to American consumers.
Pelosi’s plan has been the subject of speculation as it is one of the Democrats’ top priorities. The proposal, if signed into law after passing in the Senate, would permit the Secretary of Health and Human Services to negotiate pricing for a maximum of 250 drugs each year. The intent is for the official to work with pharmaceutical companies to lower the financial burden of American consumers. These prices would apply to individuals on private insurance as well as Medicare.
The proposal would ensure that drug prices do not rise higher than 120% of average international rates. This mirrors a measure that President Trump has proposed. Pelosi’s plan would punish drug companies that fail to negotiate a lower price with a 65% tax their gross sales. Should the companies continue to refuse, that would increase to 95%.
Potential Issues with Pelosi’s Plan
On the surface, Pelosi’s proposal might appear to be a viable solution to the problem. But the fact that drug prices would be capped at 120% of the international average indicates that negotiation would be a moot point; it amounts to simple price controls. But even still, why would this be a problem? After all, if prices for drugs are lowered — albeit by the state — won’t American consumers still benefit? Perhaps in the short term, but it could endanger medical innovation in the years to come.
When a drug company manages to develop, test, and release a product, it must recoup the costs involved in facilitating the entire process from the lab to the store shelf. This progression, which includes research and approval costs, can add up to almost $3 billion. In most cases, an organization ends up spending this money for a product that does not even get approved by the Food and Drug Administration (FDA). Indeed, only 10% of drugs get approved.
Some might respond to this reality with a shrug; so what if big pharma has to take hit, right? But the truth is that it is the American consumer who suffers. Losses such as these make it increasingly difficult for companies to innovate and develop more products that keep Americans healthy. The lessening of innovation prevents new and effective ways of treating the ailments that many people experience.
According to Townhall’s Ross Marchand, this eventuality has already taken place in Europe, which has implemented policies similar to Pelosi’s proposal. He writes:
“But this approach never works to the benefit of patients. Before the advent of mass price-fixing, Europe used to be a global center of biomedical innovation. Fast-forward a few decades and endless government tinkering, and drug manufacturers have largely ditched their European operations.”
Marchand also explains that over the past five decades, the share of new drugs being developed in France, Germany, and the U.K. has dropped from 45% to 20%. This decrease occurred as manufacturers relocated to the United States to enjoy flexibility in pricing and easier ways to protect intellectual property. For this reason, Americans do not experience shortages in the medications that they need as they do in European nations.
For many Americans, it is essential that a solution to drug pricing is found. But Europe provides a stark warning about the dangers of a statist approach to the issue. As progressives are clamoring for a government takeover of the medical industry, Europe’s example might remind others in Congress of the inevitable conclusion of such a move.
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