PF Nov 2018 - Pharma Price Controls - Con Position

Resolved: The United States federal government should impose price controls on the pharmaceutical industry.

For Intro and Pro and other PF topics click here.

Con Position

While Con may acknowledge the cost of certain life-sustaining pharmaceutical products are very high and while Con may agree that rapidly rising prices on select, limited-availability drugs may be immoral, Con must hold fast to the position that government price controls are not the answer. While the initial effect of price controls may seem favorable, as the free-market seeks equilibrium the long term effects can be very unfavorable. The advantage for the Con with respect to this topic, is Con is under no obligation to solve the problems implied by the resolution. This is, after all, Public Forum Debate and even if Con speaks first, they cannot offer any kind of a plan. Their advocacy is simply, imposed price controls on the pharmaceutical industry are bad. Period. Technically, the debate can be limited to a cost-benefit analysis; a weighing of competing harms and under such a framework, there is little need to directly refute the claims of the Pro unless they can show that any government action which directly or indirectly limits the price of pharma products does not create the kind of market balancing basic economics theory demands. In other words, in the world of the Con, for this topic, if anything is imposed, it is the burden on Pro to show that price controls will not trigger the disadvantages claimed by con. In this analysis, I do not attempt to discredit any potential claims of immoral actions by the pharma industry. If you think it may arise, cut a few cards which claim corporations are not moral agents and shift the focus back to the harms of price controls.

The Cost of Risk

The development of drugs, treatments, and devices used to augment public health is a risky venture. These products are the result of research, development, testing, and evaluation which often takes years and sometimes results in dead ends and failed tests. If a potential product shows promise, it soon faces the next major hurdle before reaching the market. It must pass through a phalanx of government requirements and regulations before it can be approved for human trials and ultimately for market. All of this comes at enormous cost in terms of hours and dollars.

Pitts 2017:

Pharmaceutical prices reflect massive development expenses. Creating just one new drug is an extremely expensive, time-consuming process, usually costing several billion dollars and taking at least a decade. And the failure rate is sky-high: Drug scientists test thousands of promising compounds for every one that’s turned into a marketable product.
Companies are willing to make such a risky investment because a breakthrough product can generate a huge payoff. But price controls squeeze that payoff. They prevent drug firms from charging prices commensurate with those massive development costs. For some companies, the payoff is no longer worth the risk, and they’re forced to scale back on new research. The U.S. Department of Commerce calculates that price controls among countries in the OECD, a major economic organization comprising much of Europe, drives away $5 billion to $8 billion in potential pharmaceutical development investment every year. That prevents the creation of three to four new drugs annually.

Evidence shows, the cost to put a product on the market can exceed $2 billion. Very few businesses have this kind of cash to on hand, so the pharma industry depends on private investors for the needed funding. Needless to say, these investors want to make money and so the promise of worthwhile reward provides the incentive. If the pay-off is limited by imposed price controls, the private investment money will go to other projects.

Vernon, et al 2004:

Price controls will have a negative effect on the development of new drugs for two reasons. First, regulations that suppress drug prices reduce expected revenues relative to costs and thereby make R&D investment less attractive from the firm’s (and investors’) perspective. This is especially the case with biotechnology firms that are “burning cash” provided by equity investors and that have no current profits or sales to fund R&D spending. Second, suppression of drug prices will also reduce the firm’s cash flows, which have been shown to be a particularly important source of financing for pharmaceutical R&D (Grabowski and Vernon, 2000; Vernon, 2003, 2004). Again, with biotech firms, the expectation that drug prices will be driven down or held flat means that future revenues will be held down as well: the return on investment of existing drugs may fall below the opportunity cost of capital. The capital markets (both debt and equity) will not provide the funds necessary to support future R&D if the government forces rates of return below the opportunity cost of capital. Indeed, we have shown empirically that more than one-third of all new drug launches would have been lost from 1980 to 2001 if the U.S. government had limited pharmaceutical price increases to the same rate of increase as the general consumer price index, thereby reducing pharmaceutical cash flows (Giaccotto, Santerre, and Vernon, 2005).

The Government IS the Problem

Con claim, the USFG, which is being asked to solve the problem of high prices, is contributing to the problem by permitting pharma companies to maintain exclusive rights to their products. This limits competition.

Engelberg 2015:

It is a bedrock principle of capitalism that as competition erodes profits on established products, enterprises will invest in innovation to earn higher profits from new products. US law governing prescription pharmaceutical markets abandons that principle and gives every new drug a long-term monopoly that prohibits competition. It also discourages competition between medicines based on comparative price or effectiveness. High prices and slow innovation cycles are the inevitable result and will remain so unless Congress makes fundamental changes in existing law.

Moreover, a pharma company can take advantage of current federal laws to keep competitors, even for non-patented products, out of the market for a significant number of years.

Engelberg 2015:

In contrast, Federal law prohibits the Food and Drug Administration (FDA) from approving a copy of a new drug for a period of seven to 12 years even if there are no patents. The FDA is also prohibited from approving a generic drug anytime a claim of patent infringement is alleged – a policy that has encouraged many frivolous patent claims just to delay competition. Drug patents also get extensions of up to five years and then an additional six-month extension for conducting studies of the new drug’s suitability for use in children. Collectively, all of these special monopolies prevent competition and keep prices high.

Current law which creates the conditions for costly drug prices, are not necessarily in place to allow the pharma industry to charge arbitrary prices for their products. They are intended to create the conditions which uphold future product development.

Glans 2016:

One point legislators must remember is a great deal of the costs created during the drug development process is due to existing government regulation. The Pioneer Institute found from discovery to launch, drug development takes about 15 years to complete. This is significantly longer than just a short time ago; development time has increased by 145 percent since 2003.
The study also found the cost of development averaged $2.6 billion in 2014. The high cost of regulatory compliance and the threat of lawsuits creates a disincentive to develop new drugs – unless there is a significant profit incentive. Affordable drug prices won’t matter much if pharmaceutical companies stop producing new products.

Profit is Not Evil

In the famous film, "Wall Street", Gordon Gekko proclaims, "..that greed, for lack of a better word, is good. Greed is right. Greed Works." But, greed has long been seen as an undesirable attribute. Some may claim it is evil. But profit should not be confused with greed. Investopedia defines profit as "a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity." Profit is the money that remains after the expenses of production and marketing are paid and the investors are reimbursed. Ultimately, profits become the most important source of internal financing in a business.

Easton 2018:

The global pharmaceutical industry is among the most profitable, driven by its ability to price to value, especially in the United States. High profits attract investors and generate money for research. The global pharmaceutical industry’s investment in research and development is second, barely, to the computer and electronics industry and well beyond that of most other industries. For comparison, the top 10 pharmaceutical companies spend five times more on research and development as a percent of sales than do the top 18 U.S. chemical companies.

In some ways the government itself is responsible for the high-cost of pharma products. Government imposes regulations and conditions which must be satisfied before products can be taken to the market and there is a significant cost to meeting these requirements. However, as already stated above, in recognizing this, the government incentives the industry by permitting product monopolies. However, even monopolies have limits in how far they can push the prices before it cuts into their bottom-line.

Carr 1976:

Let us consider the argument that monopoly power results in cost or price-push inflation. Price theory tells us that a monopolist (or any other economic actor) will be as greedy as he possibly can. He will attempt to obtain as great a profit as he can. Under most circumstances there is a unique price that will maximize the profits of a monopolist. If a price higher than this is charged, sales will fall off causing revenues to decline at a faster rate than costs decline and hence causing a decline in profits. Let us assume there is a greedy monopolist who is charging a price that maximizes his profit. What discretionary power does he have? If he changes price in any direction, profits will fall off. If nothing else changes, our greedy 'friend' will not change his price. Similarly, labour unions enjoying government-sanctioned monopoly power will not arbitrarily raise wages. To do so would be against their best interest.

Price Controls Do Not Work

In the past, local, state and federal governments have imposed price controls and given the fact that hindsight is always 20-20 vision, we know the result has been counter-productive. Even now, we can look at price controls at work in other countries around the world and see that the free-market economy and the "laws" of supply and demand will not be denied. Past recognition of these facts has made the U.S. pharmaceutical industry the world leader.

Easton 2018:

But if U.S. drug prices come under bureaucratic control, as they have in most of Europe and Japan, it will be a different story. Little pharmaceutical innovation occurs in price-control jurisdictions. The United States has always, by a large margin, led the world as a source of new drugs, and that lead has widened as Japan and Germany have imposed price controls over the past few decades. All major international pharmaceutical companies, without exception, have instituted R&D and commercial operations in the U.S. to take advantage of its pricing environment.

Like the laws of supply and demand, history itself cannot be denied and yet Pro wants to repeat the mistakes of the past. The impact to voting Pro is enormous.

Vernon, et al 2004:

In this paper, we examined how government influence in the past affected private drug prices and R&D expenditures. The results from our empirical analysis suggest that government influence in the past has had a sizable impact on real drug prices and thus R&D commitments. Estimates suggest that the government’s indirect influence on drug prices has led to a cumulative capitalized loss of $188 billion in pharmaceutical R&D from 1960 to 2001. Because this “lost” R&D means “lost” drugs, we estimate that 140 million life years were never realized because of the indirect influence that the government has had on drug prices. When expressed in dollar terms, these estimates imply that the U.S. government indirectly imposed social cost of $7–21 trillion on the U.S. economy.

The Final Focus

Judge, our evidence proves that government intervention in the costs of pharmaceutical products will have negative consequences on the industry and on the health and well-being of the people. We leave you with this closing evidence.

Morton 2001:

The imposition of price controls on a well-functioning, competitive market harms society by reducing the amount of trade in the economy and creating incentives to waste resources. Many researchers have found that price controls reduce entry and investment in the long run. The controls can also reduce quality, create black markets, and stimulate costly rationing. In the case of pharmaceuticals, the most damaging area is likely to be the reduction in innovation, which will harm all future generations of patients.
Although policymakers know that price controls can be very harmful, they continue to have strong incentives to legislate low prices for themselves. This often leads to the adoption of more sophisticated price controls. The government pegs its price to some reference price in the economy rather than choosing a fixed number, or sets its price a fixed amount below that of other customers. These schemes destroy welfare by inserting a new incentive into what would otherwise be a well- functioning market; either the price to non-government customers is higher or the price to poorer customers rises. More generally, the reference price chosen by the government rises because of the price control, not because of a change in the underlying forces of demand or supply.

For all these reasons and more, we urge a Con ballot.

Carr J, (1976), WAGE AND PRICE CONTROLS: PANACEA FOR INFLATION OR PRESCRIPTION FOR DISASTER?, The Fraser Institute, Jack Carr, 1976, Associate Professor of Econorrucs, University of Toronto, Visiting Scholar, University of California at Los Angeles. https://www.fraserinstitute.org/sites/default/files/wage-and-price-controls.pdf


Easton RJ, (2018), Price controls would stifle innovation in the pharmaceutical industry, Stat,
By ROBERT J. EASTON JANUARY 22, 2018. https://www.statnews.com/2018/01/22/price-controls-pharmaceutical-industry/


Engelberg AB, (2015), How Government Policy Promotes High Drug Prices, Health Affairs, Alfred B. Engelberg, OCTOBER 29, 2015. https://www.healthaffairs.org/do/10.1377/hblog20151029.051488/full/


Glans M, (2016), RESEARCH & COMMENTARY: DRUG PRICE CONTROLS AND PRICE TRANSPARENCY, The Heartland Institute,
NOVEMBER 14, 2016, By Matthew Glans. https://www.heartland.org/publications-resources/publications/research--commentary-drug-price-controls-and-price-transparency?source=policybot


Morton FMS (2001), The Problems of Price Controls, By Fiona M. Scott Morton, This article is excerpted from the latest edition of Regulation (Vol. 24, No. 1, 2001), the Cato Review of Business and Government. https://www.cato.org/publications/commentary/problems-price-controls


Pitts PJ, (2017), The False Promise of Drug-Price Controls, By PETER J. PITTS, May 19, 2017, https://www.nationalreview.com/2017/05/drug-price-controls-bad-idea/


Vernon JA, Santerre RE, Gioccotto C, (2004), Are Drug Price Controls Good for Your Health?, Medical Progress Report, No. 1 Decemeber 2004, Center for Healthcare and Insurance Studies University of Connecticut School of Business. https://www.manhattan-institute.org/pdf/mpr_01.pdf