Some Economic Concerns about Policies to Reduce Prescription Drug Prices

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Many proposals being considered in Congress and by the Administration would establish new rules and regulations regarding the pricing of prescription medicines. As these changes are considered, it is important to bear in mind that there are significant tradeoffs involved in most such proposals and that the actual effects may differ substantially from the intended effects. The economists’ common refrain, “There is no such thing as a free lunch,” applies. Many of the price control approaches under consideration will lead to unpredicted responses by economically motivated companies and market distortions that may end up making people worse off. What are the likely tradeoffs? Of course, most economists would point to the expectation that rational actors (including big companies, small start-ups, and the investors that fund them) will respond to reduced return on their investment in R&D by scaling back such investment. In addition, companies with products already on the market will have the incentive to adjust to changing rules in a variety of ways that drive the unanticipated consequences one should care about if one is interested in the well-being of people who rely on medicines today and far into the future.