Global Voices Sound Alarm Against Price Controls for Medicines
The US government wants to apply International Reference Pricing for pharmaceutical drugs
This attempt may be well intended but its results may put patients at risk, as shown by the European experience
(Vienna, December 1st, 2020) – The Austrian Economics Center (AEC) has expressed its concern with the intention of the US government to establish an International Reference Pricing (IRP) for medicines.
Indeed, in recent years, the US has stayed on the drug pricing issue with key proposals in the form of executive orders by President Donald Trump to implement a form of IRP with the intended outcome of lowering the prices that American consumers will pay for prescription drugs. An IRP based system for drug pricing stipulates a ‘most favored nation’ rule that the price of drugs in the national market is bound with an upward limit pegged to the best price paid by another country or basket of countries on the international market.
In Europe, 29 countries have been using a form of IRP for many years with Germany, Spain, France, and the UK set as common references for drug prices. Nevertheless, a study of orphan drug prices and affordability across a dozen European countries showed that drugs in lower GDP countries became more expensive compared to prices among higher GDP countries relative to purchasing power parity and other GDP based metrics. Some drugs that were priced below the reference price level even increased their prices to match the new price point.
Moreover, the AEC explained that while the kind of policies in place currently in many European countries, Australia, Brazil, Canada, Japan, and New Zealand among others that involve IRP aim to reduce drug prices for consumers, and may indeed succeed with that goal in the short-term, they have resulted in unintended consequences including drug shortages, disincentivizing market investment and jobs in the pharmaceutical sector, undermining intellectual property rights, and putting future innovations in medicine at risk along with the patients who need them.
According to Anton Luchner, who spent decades serving in the pharmaceutical industry in Austria, as a consequence of price regulations in Europe, many pharmaceutical companies transferred their production units to Asia along with extensive know-how and high paying jobs. Especially during the current pandemic conditions and international restrictions, national governments may consider the robustness of their domestic pharmaceutical productive capacities. Europe for example no longer produces its own beta-lactam antibiotics.
Contacted by the Austrian Economics Center, prominent scholars and NGO leaders also gave their view on the matter:
“Not least the pandemic crisis shows the need for increased innovation and entrepreneurship in the pharmaceutical industry. Price regulation affects not only the scope but also how companies work with therapies. We need to unleash creativity and entrepreneurship in the health sector, for a healthier world.” – Anders Ydstedt, Chairman, Svensk Tidskrift, Sweden
“Prices convey information and to regulate prices is a sure way to badly-informed decisions. But this basic lesson from economics is apparently hard to get through. This is not new: From price control in the declining roman empire to the price control imposed by the French revolution or the price controls prevailing after World War II, governments keep believing that regulating prices will miraculously solve their problems. And indeed, let us dream: Wouldn’t it be wonderful if the legislator could decide that, starting tomorrow, there will be no more scarcity! Erhard was smarter than that, and when he took the decision to free prices after World War 2 the ‘German miracle’ took off. If you think prices are ‘too high’, instead of regulating them you should try to understand why they are where they are. Too many regulations? Barriers to entry? This is how governments should think. Another frequent mistake is the idea that, because something is important, it should not be submitted to “the laws of the market”. This amounts to say that, because something is important we do not need to be well informed to make decisions. Does that make sense? I doubt it.” – Pierre Garello, President, IES-Europe, France
“In Europe, the prices of medicines are more regulated than in the U.S., something which has contributed to medicine producers preferring the U.S. market, contributing to medicine shortages in some European countries. In Belgium, for example, shortages amount to 5% of all deployed medicines. That’s a very serious concern for patients. It’s an iron law of economics that price controls cause supply shortages, while not allowing prices to go up also prevents companies from receiving an incentive to expand the supply of medicines. For the sake of patients, medicine prices need to be set freely.” – Pieter Cleppe, Columnist and Policy Analyst, Belgium
“In the topsy-turvy world of drug pricing, the idea is widespread that producers should subsidize consumers. And so we allow researchers to patent their drugs, but then confiscate the pricing power the patent confers, in the name of making drugs accessible. But the result, proven over the world, is that drugs become inaccessible. First, because they are not imported into low price jurisdictions, or are imported only late, and in small quantities. Second, because new drugs are not developed. Research clearly indicates the direct relation between pharmaceutical sector sales revenues and research expenditures. By declining to pay a fair price we starve the system. Finally, drug price regulations starve the local market on which life sciences entrepreneurs depend to get going. And they dramatically limit the willingness overall of the life sciences sector, big players and small to invest in the jurisdiction. Economic development suffers, the life sciences development ecosystem is constrained, and even standards of medical treatments are stultified. Drug price regulation is lose lose lose.” – Richard Owens, Munk Senior Fellow with the Macdonald-Laurier Institute, Canada
“Regulation of prices is unacceptable and contradicts the principle of the market economy. This also applies to the pharmaceutical and medical sectors. After all, it is ultimately the market mechanisms and competition that lead to price reductions. Only when the market fails the state is allowed to intervene to regulate. This was the case, for example, with the electricity, postal and telephone monopoly. Here, the EU had quasi forced a liberalization in favor of the consumer.” – Michael Jaeger, Secretary General of the Taxpayers Association of Europe (TAE), Germany
The AEC’s fundamental goal is to promote a free, responsible and prosperous society. Through education and improving public understanding of key economic questions, the AEC promotes the idea of a free market economy and the ideal of a free society.