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• Author: Tabarrok, Alex
• Position: Drug prices - Brief Article

Drug Price Controls. A "Cure" Worse Than the Disease

Earlier this year, the State of Maine passed a law to try to force down drug prices. If drug manufacturers and distributors do not lower prices after "negotiations" with the state, Maine can threaten fines of up to $100,000 for "excessive" prices, and even impose price controls. Several other states reportedly are preparing similar legislation.

Maine's politicians were especially persuaded by claims that drug prices are substantially lower in Canada. In fact, although some drugs are cheaper in Canada, other drugs are more expensive. Government studies suggesting that pharmaceutical prices are much lower in developed nations like Canada, Britain and Germany have been severely criticized by Wharton School economist Patricia Danzon ("Price Comparisons for Pharmaceuticals: A Review of U.S. and Cross-National Studies", AEI, 1999).

Danzon found that the government studies surveyed only a handful of drugs. Also, these studies did not account for the quantity of drug prescriptions. Suppose, for example, that seven drugs are more expensive in the U.S. than in Canada and three are cheaper. If the three which are cheaper are prescribed more often than the seven which are more expensive, in which country are drugs truly less expensive? Finally, the government studies sometimes compared wholesale prices to retail prices.

It is true that drugs are cheaper in less-developed countries, but this is a benefit, not a cost to U.S. consumers. Because consumers in less-developed nations cover some of the R&D costs, U.S. consumers are better off than they would be if firms charged the same price everywhere.

Put simply, if firms had to charge a single low price throughout the world there would be much less money to spend on R&D and fewer new drugs. If firms had to charge a single high price throughout the world, consumers in less-developed countries could not afford to buy any new drugs, and U.S. consumers would pay all of the R&D costs. Allowing a firm to charge the appropriate price for each market -- that is, different prices in different parts of the world -- benefits consumers everywhere.

This is not to say that there are no "free-riders" in the world community -- countries which refuse to enforce patent rights, or use price controls to force companies to sell their products at below-market prices. But the answer to this problem is not for the...