The Unintended Consequences of Dictating the Price of Medicine and What Should Be Done

I remember back in college I learned that medicine or cure that is necessary to sustain one's life is something that is [almost] perfectly inelastic being that the demand or the willingness to pay will remain the same regardless of the price. Life is priceless, after all. From these premises, many assume that it is most moral, therefore, for the government to step in, intervene in the market, and control and lower drug prices so that they become more affordable for all.

This is the first instinct of a noble policymaker: "to lower the price and make it affordable to all; better yet make it free". This kind of mentality does not consider the unintended long-term consequences, the bigger picture, the effects on the productive sector of the society and the entire economy as a whole. Henry Hazlitt explains it beautifully in the first chapter of his book Economics in One Lesson when he talks about The Broken Window Fallacy.
"While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups." - Henry Hazlitt, Economics in One Lesson
Aside from this, innovators, investors, and entrepreneurs are given less incentive while the unproductive sector of society is rewarded and eventually become dependent on this kind of welfare scheme. It hinders competition and market players that will have incentive to innovate, provide better services, lower prices, and create jobs; most especially for small and generic pharmaceutical companies who can't compete with the dictated lower prices

And this is always the type of policy that wins, of course, everybody wants lower prices and free stuff. Why would the majority vote for someone who will say that he/she is not for the manipulation of price of a certain inelastic commodity?

And so the most immediate reaction and instinct that is used in policy-making is wrong. One must use reason and not appeal to emotion. The power of the price mechanism guided by the invisible hand, when left alone, will naturally lower prices. Here are some examples of policies that will instantly lower the prices of medicine:

  • Eliminate most, if not all, taxes on medicine.
  • Give tax incentives, cuts, or even exceptions to pharmaceutical companies - this will invite more investors and competition in the pharma industry will be tougher.
  • Take out tariffs and barriers for those investors and products that want to enter and compete in our market.
  • Lessen  and abolish redundant red tapes for pharmaceutical companies and the monopolized drug approvals, accreditation, and licensing. This only breeds corruption and connection-ism and benefit only those with money, like big pharma.
  • Ease on patent law and investigate how intellectual property advocates and lobbyists might actually just be serving the interest of big pharma and not allowing competitors to enter the market. Where do they pull out the arbitrary number of years for a patent? Can a small generic pharma company really compete with international big pharma company in court when it comes to intellectual property claims?

I think legislation should have goals and expiry dates. What I mean by this is that, if a legislation is not able to attain its goal by a certain date, it will repeal itself. This will make sure that there is a free market of ideas, discussions, and debate, and that all alternatives are always examined.

Drug price control is a short-term remedy that will only have unintended consequences in the long-term. And being that it creates a short-term benefit for most, politicians are very fond of it because it increases their popularity. Perhaps especially during times like now when election season is just around the corner.

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