Don't Bite the Hand That Cures Us:
A Case Against Price Caps on Pharmaceuticals

Joseph McCleary
Issue CXXXIX - January 13, 2008
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The debate over price caps on medications has been heightened with Barack Obama’s and Hillary Clinton’s support of universal healthcare in some form. In order to reduce costs, they have proposed price caps. It goes under the rhetorical guise of negotiating with pharmaceutical manufacturers the prices that may be charged” and other insidious forms—but the candidates are speaking of price caps. Which they essentially all are in that they limit the free market’s balance of supply and demand.

Their goal is to help all Americans, rich and poor alike. In my opinion, their  goal is noble. We should try to help one another, regardless of income. But their methods are flawed.

Enacting price caps will have four disastrous consequences: There will be less research and fewer specialized cures; new companies will avoid the pharmaceutical industry; and current researchers will leave the pharmaceutical industry. Each of these consequences will indirectly lead to more Americans falling ill and dying every year. This is because price caps hamstring those who research, develop, and sell our cures.

Many people are attracted to the price cap argument because: In the short term, medications WILL become cheaper with price caps. In the long term, however, all of us will suffer from fewer medical cures.

The lower prices, which are a result of the price caps, will lead to decreased revenue for pharmaceutical companies. The decreased revenue will result in less research and some companies going out of business. Both of these consequences would be harmful to you and me. Pharmaceutical companies reinvest our money, which is their revenue, to find additional cures. So, decreased research revenue and pharmaceutical companies out of business means fewer breakthrough cures for our diseases.

Pharmaceutical companies will avoid research on specialized, price-capped cures, much like you and I would avoid opening a gourmet restaurant if the government set price caps on meals. Now thankfully, the government does not try to dictate that all meals must be sold for under $5. But this is not true with medications. Right now, many U.S. politicians are asking that expensive medications be price-capped. If put into place, this will mean that those pharmaceutical companies that invest in expensive cures will halt their expensive research, or they will go out of business. In other words, there will be fewer “gourmet” cures. So people with rare diseases, such as Achalasia, or diseases expensive to research, such as AIDS, will increasingly find fewer and fewer new medications that improve their quality of life.

Pharmaceutical companies will avoid research on price-capped cures. This is because companies don’t know if they’ll be able to recoup the money they invested. No matter what dollar amount the government decides the price cap will be, the very threat of it will dissuade companies from taking risks to cure those diseases. But if we allow these companies to set their own prices, they will be able to evaluate all the risks and undertake the maximum amount of research.

Hand-in-hand with price caps is a loss of qualified researchers in the pharmaceutical industry. Price caps restrict research revenue, which goes to pay workers’ salaries. If they aren’t earning competitive salaries, workers will leave the pharmaceutical industry for similar non-medical industries—ones that are unaffected by price caps, such as technology or biology.

Furthermore, fewer new companies will develop medications. The threat that price caps will lower revenue will cause entrepreneurs and potential businesses to enter non-medical-related industries because this is where the profit lies.  But wouldn’t it be better for these new companies and researchers to develop cures for our diseases instead of polymer research for hi-tech skis?

It is a sad fact of life, but quality healthcare has many costs. Like all businesses, if pharmaceutical companies cannot cover their costs, they will cut the production of certain products and halt the development of similar products. But remember, with pharmaceutical companies, those products are future cures. So it is our challenge, as citizens, to do everything possible to oppose price caps, and keep workers in the healthcare industry saving lives. So please tell the government, “Do not bite the hand that cures us.”

Joseph McCleary writes for the Evergreen Freedom Foundation in Olympia, Wash. It is a policy center dedicated to individual freedom and freedom in the healthcare market.

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