By Anjana Kaul
The unintended consequences of price controls on prescription drugs far outweighs the benefits.
Europe has had price controls on prescription drugs for decades. While this has helped the state save a lot in terms of healthcare costs, it has also had a number of unintended consequences that, in many cases, outweigh the savings on drug costs.
Healthcare services in most EU countries are provided primarily by the state. Hence the state stands to gain the most from such price controls. Each country has a regulator which negotiates the price of each prescription drug with the pharmaceutical company that is marketing the drug in that country. While an approval for efficacy and safety of a drug can be given by any EU country regulator and is applicable across the EU, the price of the drug has to be negotiated with each country’s regulator independently.
European countries have certainly benefited from these price controls. A 2004 study by Bain & Co states that in 2002 EU countries spent 60% less per capita on prescription drugs than the US. It also states that the EU countries have saved $840 Billion in the decade from 1992-2002 on drug costs.
However, these price controls have had many other consequences – some that can be easily quantified and others somewhat intangible.
Long price negotiations delay entry of new drugs into European countries. Pharma companies need to recover their R&D costs as early as possible to maximize returns hence they delay marketing drugs in countries with price controls. It was observed that in EU countries it takes anywhere between 7-19 months from drug launch to market availability while in the US it takes about 4 months. Moreover, when a regulator and the pharmaceutical company are unable reach a consensus on price on a drug, that drug remains unavailable in the country for even longer. These delays can sometimes result in higher healthcare costs for patients who otherwise would have been treated more effectively by the new drugs. It can also result in longer absence from work due to illness and in extreme cases can even lead to avoidable loss of life.
Drug approvals for efficacy and safety are not global so pharma companies first seek approvals for new drugs in countries or regions where they can maximize the price and quickly recover their R&D costs. It is easier to seek approval from a regulator if drugs have been developed and tested with a local country population in mind. This has led to a significant migration of pharma R&D activity from the EU countries to the US where drug approvals are faster and drugs can be released at higher prices.
This migration of R&D activity has reduced investment in pharma R&D in the EU, which is not just a direct economic loss to the EU countries but also compounded by the loss of network effects of R&D such as training, clinical trials, equipment manufacture, etc.
The number of drug patents from EU countries is declining causing loss of patent revenue. The controlled drug prices and the reducing patent revenues have resulted in declining profits for the European pharma companies.
When R&D divisions are shifted to the US, there is a flight of high value talent along with them. These R&D experts and their families would in turn have created their own network effects from high end services & retail activity that is an additional economic loss when they migrate.
Added to this economic loss is the reduced tax revenue for the state due to the declining profits of the pharma companies and the flight of high value talent.
Price arbitration across different EU countries creates opportunities for middlemen to profit by purchasing drugs in countries with lower prices and selling them in countries with higher prices. The lack of trade barriers amongst EU countries makes this very hard to control. This price arbitration gets extended to a global scale when drugs are sourced in Europe and illegally sold at much higher prices in the US.
The study done by Bain & Co illustrates with a case study of Germany that the benefit of imposing price controls on prescription drugs in fact leads to a net loss. In 2002, Germany saved $19 Billion on prescription drug expenses. However, if some of the costs of the above consequences were quantified (as shown in the study) they would add up to a loss of $22 Billion, a net loss of $3 Billion.
Anjana Kaul is a GCPP-13 alumnus
[This and the other two essays on Price Controls was submitted as part of the Economic Reasoning coursework. The question asked students to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 3 best answers were picked. The other two were on Price control on milk products in Vietnam and Price Control on Gasoline in the US in the 1970s].