(Bloomberg View) — The affordability of prescription drugs is a growing public concern, as annual drug spending continues to rise year after year. Recent pricing scandals, including the 6,000% increase in the pediatric muscular dystrophy drug Deflazacort, along with Martin Shkreli’s 5,000% increase in the toxoplasmosis treatment Daraprim, only fuel the public outcry.
On numerous occasions, President Donald Trump has vowed to take action to constrain drug prices. Although the specifics of Trump’s plans to lower prices are reportedly being hammered out as I write, the wrong action could have disastrous effects.
Many of us remember the gas shortages of the 1970s due to price controls. Government price controls will almost certainly inadvertently produce price increases in some markets and drug shortages in others.
Equally as important, misguided interference could undercut the incentives necessary to support a vibrant life-sciences industry. America’s free-market system and investments in basic research through the National Institutes of Health and universities have created the world’s most dynamic innovation engine for medical research.
Government actions designed to lower prices could end up stifling this drug innovation, harming the very consumers the actions were intending to benefit. In my years as a professor and researcher, I have seen first hand what wrong-headed government policies can do to interfere with private market decision-making, and the results are rarely beneficial to the consumer. And in my work as a consultant to pharmaceutical clients over the years, I have found this to be especially true in the prescription-drug business.
As an alternative, Trump could use his deal-making skills to negotiate voluntary pricing restraints in the drug industry. Such restraints would reduce the distortionary effects that inevitably result when the government forces specific cost-control measures in areas that may not be the most efficient places to cut costs. Instead, voluntary pricing restraints would enable individual companies to determine the most effective ways to cut their costs to reduce aggregate drug spending.
Such an approach effectively relies on social pressure to do a better job controlling price increases than any government mandate can.
How would this happen in the pharmaceutical industry? One way would be for the president to appeal to companies nationwide for a commitment to keeping annual percentage price increases in the single digits. There could also be a call to limit the number of times during a year that companies increase their prices. It would be on the pharmaceutical companies to keep these promises, and, if they failed, President Trump could bring to bear significant social pressure.
A historical precedent exists for voluntary pricing restraints in a key industry. As I remember vividly in 1962, President John F. Kennedy sought and obtained voluntary pricing restraints from steel industry executives in an attempt to curb inflation. At the outset of negotiations with the steel industry, Kennedy wisely stated:
Price and wage decisions in this country, except for a very limited restriction in the case of monopolies and national emergency strikes, are and ought to be freely and privately made. But the American people have a right to expect, in return for that freedom, a higher sense of business responsibility for the welfare of their country….
Negotiations between Kennedy and the steel industry were successful. The results were astounding: Inflation slowed, and the economy boomed (to be sure, Kennedy’s tax cuts were also a factor here). And how did the steel industry fare? The period between 1962 and the mid-1970s is often considered a “golden age for the U.S. steel industry,” with the industry reaching its highest level of production ever at nearly 140 million metric tons.
Trump could invoke the JFK precedent to cajole pharmaceutical industry executives to adopt voluntary restraints on their own pricing plans. Some major global pharma companies have already done so.
Nothing in the Sherman Antitrust Act prevents pharmaceutical industry competitors from voluntarily agreeing to prevent price gouging. In fact, pharma executives may discover that moderation in taking price increases, instead of rapacious pricing behavior, is more profitable in the long run.
— Read Competition Works Best to Control Drug Prices on ThinkAdvisor.