Price controls lead to shortages. This axiom is as dependable and scientifically absolute as the law of gravity. And it is the case even when the controls are elaborately disguised.
So, when the U.S. Federal Trade Commission (FTC) reacts to the shortages suffered in the aftermath of the COVID-19 lockdowns of vital hospital drugs, including those used in chemotherapy like Methotrexate and fludarabine, by launching a probe of distribution companies, it’s like the Federal Aviation Administration searching for ways of blaming the ground for getting in the way of the jetliner that crashed.
To FTC Chairwoman Lina Khan, the solution of shortages is a government investigation that “scrutinizes the practices of opaque drug middlemen.” Presumably, the distribution firms under scrutiny will be Cardinal Health, Cencora, and McKesson, while the collective hospital purchasing firms in the federal viewfinder are likely HealthTrust, Premier, and Vizient.
Demand for these life-saving drugs has been on the increase; no one disputes that. In a market with minimum state interference, such demand would be taken advantage of either by existing producers increasing capacity or by new firms entering the fray to deliver what the buyers are ready and willing to purchase. But when you deny manufacturers the ability to make profits in taking advantage of demand, you make delivery of new supply difficult if not impossible.
Treating health care as a right is a deceptive description of what is actually the removal of the profit motive from the production and delivery of things and services of value. When you do that in any field, you exit the reality of human nature. What, after all, is more valuable than medicines and treatments that maintain your health? And the scientists, physicians, and businesspeople who have the expertise, or even genius, to invent, mass produce, and deliver medical care to patients must expect to be compensated based on market value—which, in bad news for the envious, ends up being many, many multiples of the minimum wage—otherwise they will devote their abilities elsewhere.
In other words, like anything else for sale, health care must be opened to customer scrutiny. When it comes to generic drugs, sadly, owing to the laws on the books, it’s like walking down the aisle at the supermarket and finding all the boxes of cereal or jars of jam identical, except for the price differences. No labels, no brand names, and the brand’s accompanying reputations based on past experience buying them. The healthcare consume—be it a patient, a pharmacist or a hospital—can only make a blind, ignorant-by-design comparison.
The Hatch-Waxman Act of 1984 vastly expanded the production and accessibility of generic medicines by shrinking regulatory delays in the approval of generic versions of patented drugs. Prices of generics plummeted and their use skyrocketed. The main driver was lots of competition among generics.
But sometimes various factors can reduce that competition for certain of the products; narrow profit margins, for instance, can lead to a manufacturer getting out, and—human nature being what it is—the companies remaining finding little reason not to raise their prices, sometimes with the power of a near-monopoly. New suppliers, in the meantime, face massive regulatory hurdles; the Food and Drug Administration (FDA) has a backlog of thousands of applications from generic manufacturers awaiting approval, and the wait time is years. The FDA jealously and outdatedly guards its approval power even though there is no evidence that the drug supply in the United States today is any less safe than that of other developed countries. Approval in those countries should be trusted here when it comes to often vitally needed imported generics, a move that would make more drugs available, lower their prices, and improve the health of Americans.
When in 2022 a labor shortage at Teva Pharmaceuticals caused delay in production of the generic Adderall, a treatment for attention-deficit hyperactivity, the Drug Enforcement Administration’s harsh production quotas imposed on rival manufacturers prevented them from coming to the rescue and making up for loss of supply.
Brookings Institution Center on Health Policy senior fellow Marta Wonsinska notes, “The price pressure on manufacturers is tremendous and certain types of drugs, especially generic sterile injectables, are particularly vulnerable.” This artificial environment in which buyers are forced to choose based only on price, not weighing it alongside quality, is not a true market.
The Obama administration reacted to less serious prescription drug shortages by issuing a directive on Halloween of 2011 that, among other things, ordered the FDA to work with the Department of Justice on any findings of shortages being used for stockpiling and price increases. As with the FTC today, government is always seeking a villain and refusing to gaze into the mirror.
The Pharmaceutical Research and Manufacturers of America (PhRMA) was long ago complaining of a “gray market” taking advantage of shortages, “with the potential for price gouging” by secondary wholesalers, causing “serious concerns for patient safety.” It was also long ago recommended that PhRMA set out to forestall more government regulation by advocating an industry‐wide policy, by brand-name and generic manufacturers alike, to require purchase only from the manufacturers themselves and sales made only directly to pharmacies and hospitals, thus eliminating the effect on prices of a gray market distribution chain. Pharmacies and hospitals would require documents recording a drug’s distribution route. The industry’s motivation for embracing this idea is the higher revenues for manufacturers that would result, and the increased safety of the drug supply chain.
Returning to the matter of human nature, setting a high price for medicines when the situation allows is not always as crass and greedy as it may sound. About 90 percent of proposed medicines that go through testing ultimately fail to be offered to health providers and patients because they are found to be unsafe or not to affect a cure or a proper treatment. Thus, the cost between invention and sale to the public comes in on average at billions of dollars for each drug. That means that these evil, greedy pharmaceutical companies recoup their astronomical investments from the one in ten medicines that do make it to shelves.
When you turn these firms into villains, declare their profits to be obscene, shake them down and force them to cut their revenues, all you are doing is making them again and again not devote the money needed to bring new cures to patients. And this remains the truth in spite of the fact of their being bad actors—gougers, con artists, and the like—to be found in the field of medicine, as they are to be found in any and every other walk of life.
As the Manhattan Institute’s Tim Rice warns, “With too many barriers to recouping their investments, pharma companies will stop taking risks, and innovation will suffer.”
Having government treat health care as a right renders that care a scarce commodity. The way for the maximum number of patients to receive the highest quality of care, including highly expensive, innovative drugs, is to accept the real world of profit and price as necessary mechanisms of distribution in a free society, and keep the heavy, self-serving hand of government out as much as possible.
