The Costs and Consequences of Drug Price Controls



Prescription drug prices are a popular target of lawmakers looking to mitigate rising healthcare costs in the United States. Recent years have seen both state and federal government officials suggest legislation that would implement price controls or impose strict reporting requirements on drug manufacturers.

While intentions for price controls and reporting requirements may be good, outcomes would be quite grim. Experience from countries with more bureaucracy in healthcare has demonstrated price controls and the like neither reduce healthcare spending nor increase healthcare access. Rather, these regulations stifle innovation in the pharmaceutical industry, create drug shortages, and ultimately lead to fewer choices for consumers and patients.

Government is the Problem, Not the Solution

Currently in the United States, it takes about 10 years to develop a new prescription medicine, which includes the six to seven year clinical trial process the Food and

Drug Administration (FDA) requires for drug approval. In addition to being a longterm commitment, the drug creation and development process is also very expensive, costing an average of $2.6 billion to bring one new drug to market.

Unfortunately for consumers, the FDA is also slow in approving generic drugs, which are less expensive alternatives to name brand medication. Indeed, the FDA’s 47 month long approval process is depriving patients access to more affordable medication. As of July 1, 2016, there were more than 4,000 generic drug applications pending FDA approval.

Considering these onerous and expensive regulatory costs, it is not surprising to hear that only 12 percent of drugs that begin preclinical testing actually make it to the market. Extensive development costs and procedures are in part responsible for setting drug prices.

New Regulations Will Not Help

While forcefully reducing drug prices may curb upfront costs, such policies would be incredibly destructive over the long term. Capping drug prices would disincentivize innovation, as drug makers would be restricted from recovering their costly investment and generating a profit.

In that vein, it is important to note that the whole of the biopharmaceutical industry reinvests record amounts of money into research in development each year – nearly $60 billion in 2015. If government forcefully limits the price of a drug, less profit will be available to finance the next generation of life-saving and life-improving medicine. Buttressing this point is research from the nonpartisan RAND Corporation, which estimated a 20 percent revenue cut for the pharmaceutical industry would impose costs of about $51,000 on 55–59 year olds in 2060, and that today’s children would have their life expectancies shortened by nearly one year.

Disclosure requirements, which force companies to disclose proprietary information, are also problematic. First, such mandates overlook the fact that the value of medicine is affected by the final FDA labeling requirement. By highlighting “input” costs and failing to offer a true snapshot of overall drug development costs, disclosure requirements distort profit margins.

Second, stockpiling, which already happens today when price changes are announced, will become more opportune, as disclosure requirements will offer even more advanced notice of changes in price. This risks healthcare access for patients, as stockpiling risks drug shortages both at the state level and nationwide.

Third, pharmaceutical companies would be burdened with added compliance costs associated with disclosure requirements, thus making it harder for existing companies to remain in business and create new drugs, and more difficult for new companies to enter the market

With fewer companies, less innovation, and fewer drug options available, consumers will be robbed of access to treatment that could save, or drastically improve their lives or the lives of loved ones.

Free Markets are the Best Solution to Drug Costs and Healthcare Access

When it comes to the price of prescription drugs, many wrongfully assume government intervention is the only way to control drug prices. In reality, there is another, better option: Free market competition.

Competition between drug providers encourages them to offer consumers the lowest price possible. Put simply, if a provider offers the same quality drug as another provider, but at a less expensive price, consumers will migrate towards the former option. As such, competition is the best way to keep drug prices in check. This natural, free-market solution was demonstrated in the Hepatitis C medication market, when the original, $1,000-per-pill medicine decreased 46 percent in price overnight upon competition from other companies.

Further, competition also encourages providers to innovate, and develop higher quality and new types of medication. Unfortunately, the biggest barrier to reporting requirements, that are costly and time consuming, reduce the resources with which drug makers have to reinvest in research and to innovate. This, in turn, hurts consumers and patients, by reducing the number of new life saving and improving drugs that come onto the market in the future.


While drug costs may seem high, the reasoning is not as simple as the media would like us to believe. The claim that U.S. drug spending is growing out of control is simply not true. Spending on prescription drugs as a share of all health care spending in the U.S. is the same as it was 60 years ago. 

Fewer barriers to entry would allow drugs to come onto the market sooner, and create competition among providers. This would, in turn, lower prices, spur innovation, and ultimately lead to better and more accessible healthcare. Rather than turning to price controls and regulations, lawmakers should pursue policies that encourage medical discovery, not punish it.

Speaker Paul Ryan and Senate Majority Leader Mitch McConnell are in the process of getting their caucuses on the same page with an Obamacare repeal and replacement plan that will increase access to care by reducing costs through a more consumer oriented system in which states have greater flexibility to innovate. While that’s happening, lawmakers toiling away in the 50 laboratories of democracy should reject misguided proposals to impose state-level drug price controls, and other big government meddling with the market.