A Price Control by Any Other Name is Just as Toxic

Drug prices in America are incredibly high, and that is a real problem facing patients throughout the United States. The tricky part is finding out how to solve it. And, in the words of Sting, “It’s hard to tell the poison from the cure.” There is no better example of a poisonous “cure” in the world of pharmaceuticals than government price controls. 

A price control is a government mandate that pressures or forces a business to lower the price of its product to what the government deems to be an acceptable level. The logic behind price controls seems to make sense: “Companies are charging too much for drugs? Easy. We’ll just make it illegal for them to charge too much.” On closer inspection, this solution does not solve anything — it actually worsens the problem — but it has nonetheless grown in popularity in recent years. Considering this trend, the public needs a reminder of exactly why price controls don’t work. 

The government does not have localized knowledge of individuals’ utility, resources, or decision-making processes on a transaction-by-transaction basis. Because the government cannot know what goes into a price, it is impossible for it to assign the correct price to any given product. Prices are the most important signal that companies use to find out what provides value in the economy, so any attempt to set an imaginary “just” price will result in less availability of pharmaceuticals for the people who need them most. 

Price controls create shortages. When the government caps the price of a good below market value, the lower price allows more people to buy it but also makes the good less worthwhile to produce for companies. Ultimately, the artificial price creates a massive gap between the large number of people who want the good and the small quantity available for sale. This gap is called a shortage. It is not a new principle that price controls create shortages. Economists have observed shortages due to price controls for the last hundred years. 

The most recent repackaging of price controls is external reference pricing. External reference pricing is a price control that bullies companies into matching the price of cheaper drugs in other countries, regardless of supply and demand differences. Lately, external reference pricing has gained traction as a “Pro-America” idea in right-leaning circles because proponents sell it as a way to fight back against unfair foreign competition. Although external reference pricing is just another name for the same price controls that shackle economies all over the world, the past few months have seen increased calls to implement the policy along with protectionary measures like tariffs and subsidies. The Trump Administration’s recent efforts to push its so-called Most-Favored Nation Drug Pricing is a result. A recent executive order, which directs the Department of Health and Human Services to start pushing companies towards external reference pricing, went into effect last month, meaning HHS will start making recommendations in the coming months about which drug prices it should slash. 

Government price negotiation is another type of price control. Entities of the government argue that programs like Medicare and Medicaid should make recommendations and “negotiate” with companies to get cheaper drugs to provide to patients. Unfortunately, “negotiation” is a euphemism for the government exerting pressure on prices to get a better deal. The reality is that no one “negotiates” with the government, because the government makes decisions with the force of law, not with mutual trade. The Inflation Reduction Act established negotiating powers for Medicare in 2022, powers that have continued to cause producers to exit the market and could cost billions in unrealized annual savings, depending on how long the controls continue and the number of drugs Medicare chooses to control in the upcoming years. 

Drug Affordability Boards are price controls at the state level. Affordability boards are state entities that review prices and either recommend or implement limits on those prices based on their reviews. Most of the affordability boards are softer price controls centered more on providing institutional pressure on prices rather than outright mandates. In 2021, however, Colorado implemented the most restrictive affordability board to date, which “prohibits, with certain exceptions, any purchase or payer reimbursement for a prescription drug at an amount that exceeds the upper payment limit established by the board for that prescription drug.” Minnesota, Maryland, Oregon, and Washington followed suit. Last year, AFP applauded Governor Glenn Youngkin’s veto of SB 274, which would have established a Colorado-style drug price board in Virginia.  

Price controls, no matter what flavor, hinder economic growth and get in the way of human flourishing. Measures like external reference pricing, price negotiation, and drug affordability boards sound like different proposals, but they share the same core problems. We must continue to fight every rebirth of this policy that appears in order to safeguard our progress as a people and our access to life-saving healthcare.