History tells us that government price controls do not work, yet our government leaders continue the call for them.
The latest is the instance of secretary of Health Human Services Sylvia Burwell, who has called for government-negotiated prices on certain pharmaceutical products, such as medications administered via EpiPen injection devices. Burwell claims a shortage in these products could have been avoided if Medicare and Medicaid had the ability to negotiate the price with the manufacturer of these products.
President Obama has also called for the government to be able to negotiate drug prices with the pharmaceutical companies. Presidential candidates Hillary Clinton and Donald Trump have claimed such negotiations could bring price savings. Yet the history of efforts to do this show that government price controls do not work and do not bring cost savings to anyone.
Secretary Burwell wants Congress to give HHS the authority to negotiate drug prices on behalf of Medicare and Medicaid recipients. A two-pack of EpiPens rose from about $100 to $600 this year, after the maker of them was acquired by Mylan. Burwell contends having such authority would have prevented that price increase.
But the problem is simple, government-negotiated price controls do not work. In the 1970s, under President Richard Nixon, price controls were set on a variety of products with the intent of slowing inflation, which led to the high level of inflation in the later 1970s. In fact, the combination of inflation and high interest rates during the stagnant economy years of the Jimmy Carter presidency led to the coining of the term “stagflation.”
The most efficient means by which prices are set for products and services is through competition in an open and free market. The balance of supply and demand in the free market sets prices at the lowest possible level, which benefits the consumers of those products. When government decides the products to be sold, and the prices charged for them, the product changes and prices almost invariably rise.
When Congress enacted legislation to restrict the pricing of basic cable television services in the early 1990s, a few years after the regulations were imposed, prices went up. The number of channels included in what cable service providers called “basic” packages declined, causing the overall cost of cable television to increase for the same number of channels purchased.
The government will not be any more effective in setting price controls on prescription drugs than it has on any other products. Secretary Burwell should know this, or at least study the history of price controls, and she should not be calling for additional price controls that will also fail.
It is easy for politicians to call for price controls and convince voters they are doing something about high prices, but in reality this is good politics but poor public policy. Price control have never worked in the past, and there is no reason to believe they will work now.
