Socialist Price Schemes Will Be Harmful to Patients

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A recent study published in Health Affairs reached a controversial conclusion, that the United States should adopt socialist price schemes to reduce drug prices.

The study, “Using External Reference Pricing In Medicare Part D To Reduce Drug Price Differentials With Other Countries” argues that by matching prices with those in other countries, the United States can reduce spending in Medicare.

The proposal is not new, but it is dangerous.

In October 2018, the Trump Administration released a similar proposal which would cap the price of certain drugs in Medicare Part B using an average of the price of the drug in sixteen “reference countries,” including many with socialist healthcare systems. The proposal, known as an international price index, drew swift criticism from patients’ groups, as it would restrict access to needed medicines.

The recent Health Affairs study doubles down on the policy, arguing that the U.S. could reduce spending in Medicare by adopting this reference pricing. Unfortunately, it employs questionable assumptions to compare prices in the U.S., Japan, the U.K. and Ontario, masking reduced access for patients and reduced innovation in dubious price estimates, including not adjusting income or currency disparities as well as applying estimated rebate amounts to generate target numbers.

Adopting its proposed international price index would have immediate and tangible effects for patients.

First, an international price index will restrict access to live-saving medicines for patients by limiting the drugs covered by Medicare.

Drugs are often launched in the United States because of the free market forces which allow companies to recoup their investment. The study even acknowledges this, stating “the US is often the first country where drug companies sell the drugs.”

Though the authors don’t spend much time on this point, it is critical.

In fact, in looking at reference countries in the Trump Administration’s proposal, in the U.K., Japan and Greece only 74 percent, 49 percent and eight percent, respectively of the 74 cancer drugs launched between 2011 and 2018 are available. It’s notable that the U.K. and Japan are both reference countries in the Trump administration proposal as well as the Health Affairs study.

Importantly, 95 percent of those drugs are available in the United States.

This access is part of why the White House Council of Economic Advisors notes that “U.S. cancer patients live longer than cancer patients in 10 countries that belong to the European Union, after the same diagnosis.”

Countries with government-controlled systems restrict access because they can only control costs in two ways; first, by forcing companies to accept below market-value prices or, second, by restricting care. When companies cannot accept below market-value prices, those governments forgo those treatments.

More importantly, that means those citizens also forgo those treatments, whether they’d like to or not.

In addition to restricting access, an international price index will reduce overall investment into research and development.

Why? Because, bringing new drugs to market is expensive. One of the best estimates from health economists at Tufts University found that from research and development, approvals and post-approval R&D, bringing a new drug to market costs $2.87 billion.

Reducing incentive to innovate by capping costs reduces a company’s ability to take on such risk, slowing or stopping research into complex and harmful conditions or diseases.

The study skirts this reality, instead focusing solely on misleading price generalizations. It does not acknowledge that the problem is that socialist countries, including some reference countries in the Trump Administration’s proposal, leverage their monopsonic purchasing power to distort the market. 

The United States generates this innovation to the tune of 44 percent of world medical R&D, 75 percent of global medical venture capital, most of the intellectual property rights for new medicines. Countries which cap their markets are freeloading off of this investment and innovation.

The international price index model, instead of penalizing or addressing this freeloading, adopts this practice.

Finally, it’s important to note that the study was funded by the John and Laura Arnold Foundation, which was founded by billionaires John and Laura Arnold. The Arnold Foundation advocates for aggressive government intervention into healthcare, including funding candidates who support their positions on drug pricing to primary elected officials.

The Arnolds openly refer to the drug market as “a form of oppression” and argue that it is not capitalism…while advocating for socialist price controls.

The Arnolds are activists, as is their right. But it is important to call out this clear bias when assessing a study with such clear policy implications based upon misleading conclusions.

When activists continue to push for socialized medicine schemes such as “Medicare for All,” adopting price caps which would distort the healthcare market is a dangerous first step towards all out, government-run healthcare. The policy advocated for in the study would be such a step, immediately reducing access to medicines for patients and reducing investment into tomorrow’s cures.

Americans of all political stripes should be concerned by these developments and should reject these proposals in favor of real, market-based policies which encourage competition and transparency to help bring down prices.

Matthew Kandrach is President of CASE, Consumer Action for a Strong Economy, a free-market oriented consumer advocacy organization.

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