Opinion Editorial | |
| Wednesday, May 17, 2000 | |
Drug Price Controls Don't Work In Canada, Either |
Last week, Maine became the first state to enact price controls on prescription drugs. The Legislature was moved to act because drugs often sell for significantly less in nearby Canada, as the result of that nation's drug price controls. The assumption is that if Canada is not suffering any negative effects from price controls, why shouldn't Americans have the same benefits?
This argument is also being made by Democrats on the national political stage. Hillary Rodham Clinton has extolled the virtues of price controls in her campaign for the U.S. Senate in New York. She is supported by New York's junior senator, Charles Schumer, who has cited staff surveys showing that drug prices in Canada are as much as 200 percent lower than in the U.S. (Presumably, this means that one is paid 100 percent of the price in Canada for buying drugs, since a price 100 percent lower would be zero.)
Those making these arguments clearly know nothing either about the true situation in Canada or about price control's long history of failure. Far from being some sort of "free lunch," price controls would offer temporary benefits at best, with long- term costs that could prove deadly.
The only reason why price controls on drugs work in Canada is because Canada is what economists call a "free rider," someone who takes advantage of a cost that someone else is paying. In this case, the cost is drug research and development, most of which takes place in the United States. Almost none is done in Canada because drug companies cannot make a profit there due to price controls. Indeed, Canada's total spending on drug research is barely enough to bring one new drug to market each year.
Since the cost of bringing a drug to market is the largest share of the price of new drugs, anyone who can avoid development and testing expenses will of course be able to sell them at a lower price. The problem is that not everyone can be a free rider; in the end, someone has to pay for research and development. If no one does, then the supply of new drugs will dry up, putting patients at the mercy of diseases for which there presently is no cure, and depriving them of superior treatments.
In any case, the Canadian situation is often portrayed as better than it really is. Canadian Dr. David Gratzer, author of the new book "Code Blue" about Canada's health system, points out that price controls only lower the cost of patented, name-brand drugs in Canada. Generic drugs, which account for almost half of all prescriptions in the U.S., actually cost less here. Also, many of the newest drugs are simply unavailable in Canada because the government restricts their use in order to keep costs down.
Although naive liberals like Mrs. Clinton and Sen. Schumer may view Canada's nationalized health care system as some kind of Nirvana, few Canadians share their view.
The fact is that price controls never work for very long, but despite their failure they become extremely difficult to lift once imposed. Thus, in return for a very short-term benefit, consumers end up paying a very heavy long-term price. Perhaps the classic example is rent control in New York City. Imposed as a "temporary" measure during World War II, the controls continue to the present day. The result has been a steady deterioration in the housing stock, with the ironic consequence that rents are actually higher in many cases than would exist without rent controls.
Some years ago the great economist Frank Knight, exasperated by the resistance to lifting price controls after World War II, had this to say: "If educated people can't or won't see that fixing a price below the market level inevitably creates a 'shortage' (and one above it a 'surplus') it is hard to believe in the usefulness of telling them anything whatever, in this field of discourse."
Price controls on drugs is a bad idea and nothing in the Canadian experience proves otherwise.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 17, 2000.
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