Price Controls and Grandma’s Medicine

Price Controls and Grandma’s Medicine
April 1, 2001


Many legislators believe they are assisting senior citizens by interfering in the normal market process that establishes prescription drug prices. History, however, provides evidence to the contrary.


Pathetic Record of Price Controls

In 1887, the government experimented with price controls with the Interstate Commerce Act. The purpose was to create a single price for all rail services for all consumers. In short order, the rates for railroad transportation went up for everyone. Congress eventually eliminated the program.

Another experiment in price controls was the 1938 Civil Aeronautics Act. When the Act was abolished roughly 20 years ago, airlines began a policy of discriminatory—that is, tailored—pricing that resulted in dramatically lower airfares for most Americans. With market-pricing back in place, airline tickets today are 40 percent less than they were during the era of federal price regulation.

Wage freezes and price controls during World War II artificially suppressed inflation, causing shortages and black markets in all manner of consumer goods. When price controls were lifted, inflation burst out in the open and consumer prices soared.

Price controls during the Nixon era were also unsuccessful. After the energy price controls of the ‘70s were lifted, the long gas lines disappeared and the price of a gallon of gas (less federal and state taxes) fell sharply.

Even the mere threat of price controls can cause dysfunction in our health care economy. Specifically, the national health care plan proposed by former President Bill Clinton clearly created an adverse reaction in the market.

Research and development (R&D) spending by pharmaceutical companies had increased 12 percent between 1992 and 1993, the year before the Clinton plan was formulated.

Between 1993 and 1994, during an overt attempt to socialize the health care system, the R&D spending increase was just 2 or 3 percent. Between 1994 and 1995, when it became clear the nation would not tolerate Clinton’s approach, R&D spending again increased by double digits.


Faulty Collective Logic

Regular readers of this column will become familiar with the term “collective logic” as my description of the standard operating mindset of bureaucrats who think we are all the same, and therefore believe in one-size-fits-all legislation.

When it comes to controlling the price of prescription drugs, who do legislators think they are helping? According to data from the Health Care Financing Administration (HCFA):

  • over 65 percent of senior citizens already have some form of insurance or other financial support for the purpose of obtaining their prescribed medication;
  • 30 percent are not financially affected by current pricing practices, or are persons with little or no need for medication;
  • 5 percent do, in fact, need financial assistance for prescription drug purchases . . . but not the kind of assistance that disrupts the marketplace for everyone else.


Price Discrimination Promotes Efficiency

Kids and seniors can buy a movie ticket at a lower price than other adults. As a result of this perfectly legitimate age discrimination, a theater operator can show a film to a larger audience and fill otherwise empty seats.

Internet airline ticket sales—discrimination according to computer access—allow customers to fill previously unsold seats at the last minute. The otherwise lost revenue protects against overall ticket inflation.

Some restaurants charge seniors (like me) less than they charge the slightly younger person sitting next to me—even when we order the same meal. Neither of us complains.

Those with an over-active liberal agenda proclaim it wrong for the average person to pay more for a prescription drug at a pharmacy than the discounted price the federal government has extorted from the manufacturer. Comparing the wholesale purchase of drugs by the government with the retail purchase by a single consumer is an apples-to-oranges comparison. No surprise, such a comparison leads to the wrong conclusion.


Price Controls Hurt Consumers

In the end, forcing price controls on pharmaceutical manufacturers would create an unsustainable market price below the true value of the medications these companies produce. If their products are under-valued, pharmaceutical companies will earn less, investors will value their stock less, and the CEOs will spend less on research and development.

Medications like Prozac and Zoloft have improved the quality of life for millions of people suffering from depression. Those with hypertension are helped by drugs like Norvasc. Heart attack and stroke victims as well as AIDS sufferers are leading dramatically improved lives because of new and innovative drugs.

If drug price controls like those being discussed and implemented today had been legislated just 10 years ago, many valuable drugs would not be in Grandma’s medicine cabinet today. Attempting to manipulate the market-pricing of drugs sacrifices the rights of individual patients, doctors, and drug manufacturers to the will of those who seek to live at the expense of others. It ultimately fails to achieve even their own selfish goal.