There seems to be at least some support on both the left and the right for letting government dictate Medicare drug prices. Both Donald Trump and Hillary Clinton spoke of it often during the campaign. Bernie Sanders fights for it in the Senate.
Too bad it’s such a dangerous idea.
They say that having Washington negotiate prices with drug makers under Medicare part D – the prescription drug benefit for seniors – is a good idea. But should their proposals become law, they will bring the same problems price controls always create: shortages and economic distortions.
Whenever the government uses its clout to set prices, it invariably inflicts harm.
Consider minimum wage laws. Though intended to help workers by boosting their incomes, wage mandates artificially elevate the costs that businesses must pay. If those employers can’t pass the cost increase on to their customers, they often have no choice but to lay off some workers or stop hiring.
South Carolinians have experienced the unintended consequences of minimum wage increases firsthand. Between July 2007 and July 2009, the federal minimum wage rose by $2.10.
Teenage workers, who disproportionately work in minimum wage positions, paid the price. Employment among our state’s 16 to 19 year olds plummeted by almost 9 percent.
Minimum wage hikes have caused job losses in cities around the country. A Seattle minimum wage increase in April 2015 subsequently led to the loss of 1,000 restaurant jobs in May. American Enterprise Institute economist Mark Perry said that it “was the largest one-month job decline” in years.
Meanwhile, restaurant job growth in San Francisco slowed significantly upon the city’s minimum wage bump. The city’s growth rate held at a low 1.4 percent, while the rest of the state boasted a 3.4 percent job growth rate.
There’s no getting around the fact that price control laws are economic disasters. As 500 economists, including three Nobel laureates, pointed out in a letter to Congress, when businesses are “saddled with a higher cost of labor,” they “will need to cut costs.”
Every government policy that sets price floors and price ceilings creates economic distortion. More than three-fourths of economists agree that “a ceiling on rents reduces the quality and quantity of housing available.” And 74 percent disagree with the idea that “wage-price controls are a useful policy option in the control of inflation.”
Yet despite all of this warning against price controls, national leaders are looking to price caps to lower the cost of Medicare Part D drugs.
Part D is based on market competition, which is why it’s the one component of Medicare that consistently comes in under budget. Insurers drive hard but sustainable bargains in negotiations with drug makers. In so doing, they assemble attractive and affordable packages of drug coverage.
That affordable coverage and access to drugs would disappear if government officials weasel their way into pricing Part D’s drugs. While “negotiations” is a popular talking point, the federal government actually would just dictate the price it’s willing to pay. Some drug makers won’t be able to afford to sell at that price. Seniors will be out of luck.
This is not a hypothetical scenario. It’s already happened at the Department of Veterans Affairs. The program uses price controls instead of competition to control expenses. As a result, officials have excluded almost 20 percent of the top 200 drugs most prescribed by Medicare Part D from the VA’s list of covered medicines.
Price controls invariably cause shortages. Rent control causes housing shortages. Price controls on gasoline during the 1970s led to shortages and long lines at service stations. Wage controls limit the number of jobs employers offer.
Government “negotiations” with drug makers might reduce the cost of some medicines — but the tradeoff will be widespread, VA-style drug shortages for seniors. Perhaps the politicians who support such government intervention don’t care about limiting 450,000 South Carolinians’ access to the medicines currently available through Part D. If that’s the case, they should at least be honest with voters about what will happen: we’ve swallowed that pill before and know the negative side effects that are sure to follow.