Ten Myths about the Market for Prescription Drugs
Myth No. 7: Price Controls Can Reduce Drug Spending
Proponents of price controls argue that cuts in drug prices will lead directly to cuts in total drug spending. In fact, the opposite will occur. A 1993 study by Heinz Redwood and a 1994 study by David Gross comparing international pharmaceutical spending controls found that:
- While price controls produced lower prices, they did not reduce total pharmaceutical expenditures (price times volume) nor did they contain total health care spending.23
- Moreover, pharmaceutical expenditures grew faster in countries with price controls than in the United States.
"Price controls encourage increased consumption of drugs and the consumption of inferior drugs."
Price controls usually are part of a government-run program that provides consumers with prescription drug benefits. Attempts to drive down the drug costs through price controls have two unintended results: (1) they encourage increased consumption of drugs and (2) they lead to the consumption of inferior drugs.
Many European health systems spend more on drugs per capita than is spent in the United States, but Americans use newer and more appropriate medications for such diseases as depression, high cholesterol, high blood pressure and cancer. That is one reason Americans spend less time in hospitals when they are sick and have a higher quality of life than Europeans.
European and Japanese consumers face an entirely different basket of pharmaceutical products than do Americans.
- The U.K. National Heart and Lung Institute noted that nearly 90 percent of Europeans who have experienced heart failure and who should be receiving ACE-inhibitors are not, despite the availability and demonstrated ability of these drugs to prevent second heart attacks and left ventricle dysfunction.
- Ninety percent of heart failure patients in France were not receiving an ACE-inhibitor, at a potential cost of 16,000 lives and $528 million over four years.24
Europeans are more likely to consume drugs that could never be approved by the U.S. Food and Drug Administration, which despite its reputation for regulatory delay is still the gold standard for drug approval worldwide.
However, it is Japan that demonstrates most vividly how reducing drug prices through controls affects health care quality. The Japanese government has in recent years cut prices of drug products from global pharmaceutical firms by 50 percent. It allows local drug companies to go to market with new drugs at higher prices but cuts the prices in later years. Patients do not pay for drugs directly; doctors make most of their money by filling their own prescriptions. Japanese doctors often load their patients with prescriptions, marking up the prices allowed by law and pocketing the difference. On average, a doctor prescribes 13 different medications to people under his care.25 As a study by Tom Thomas, an economics professor at Emory University, points out, the vast majority of Japanese medications marketed and prescribed are useless.26 Unable to obtain the best drugs to treat their diseases, Japanese consumers are sicker and spend more on other types of health care.
Price controls distort the quality of care in many ways, not least by shifting both the production and availability of medications towards older and less innovative compounds. The result is that people cannot have access to the most cost-effective medications and are forced into hospitals.27
"Price controls directly drive up total spending on drugs."
So consumers in countries with price controls often wind up consuming many more drugs that are less effective or totally ineffective than more innovative products. These countries tend to spend more on drugs as a percentage of their health care dollar, as Figure III shows, but they get less value in the process. Either way, price controls directly drive up total spending on drugs.