TGIF: Maestro Trump and Drug Prices

When encountering a public problem, people tend to fall into one of two camps: one camp, the larger one, says, "There oughta be a law." The other one asks, "How has the government created or aggravated the situation?" We know which camp Maestro Trump belongs to.

Take prescription-drug prices. Because Americans pay higher prices on average for prescription drugs under patent (but not for generics) than people in other countries pay, Trump, who used to call price controls "socialist," has ordered the drug companies "to offer American consumers the most-favored-[developed-]nation lowest price." He wants private companies to lower their prices at home and raise them abroad.

Is this a command? Trump's executive order goes on: "should drug manufacturers fail to offer American consumers the most-favored-nation lowest price, my Administration will take additional aggressive action." We know what that means. "If ... significant progress towards most-favored-nation pricing for American patients is not delivered," his order says, "to the extent consistent with law,... the Secretary [of health and human services] shall propose a rulemaking plan to impose most-favored-nation pricing." Got that? Impose.

Why did Trump change his mind about price controls? Because now it fits with his demagogic populist politics of national grievance, which has served him so well. He vows to end "global freeloading" by foreigners who pay less. He believes that Americans subsidize foreigners. But do we? Good economics says otherwise. (We'll get to that.)

The Maestro seems not to realize that price controls have failed for 4,000 years! They bring shortages, reduce innovation, and cause other distortions, which the government then tries to fix by expanding its restrictions. Never mind that the government makes drugs more expensive than they would be in an unhampered market.

Prices will differ from country to country for sensible reasons. Economists call this market segmentation and price discrimination. Some people in certain circumstances are willing and able to pay more than others whose circumstances differ. We see this with airline fares and off-peak movie ticket prices. Americans are richer than other people and can afford to buy things that others couldn't and wouldn't buy at American prices. Sure, everyone prefers all prices to be lower—except his own, of course—but does that mean the government could mandate lower prices without negative consequences for all? No.

Once a modern drug is produced and sold in the rich American market at a price high enough to yield a profit and recoup the stratospheric R&D costs, the drug maker can produce additional quantities at a low marginal cost and profitably expand sales to poorer people abroad at a lower price. This is good for the foreign buyers who otherwise wouldn't have access, but it does not harm Americans: regardless of what others pay, they buy the drug because they think the benefits exceed the cost.

A government decree to make prices more equal would be harmful all around. As economist Alex Tabarrok writes, banning price discrimination "will end up hurting patients in low-income countries while delivering minimal gains to Americans. Worse, by reducing pharmaceutical profits overall, it weakens incentives to develop new drugs. In fact, in the long-run U.S. consumers are better off when poorer countries pay lower prices—just as airline price discrimination makes more routes viable for both economy and first-class passengers." Likewise, if movie theaters couldn't price-discriminate, we'd have fewer theaters and less service from surviving theaters because profitably filling seats at off-peak times would not be an option. When the government restricts profits, it restricts supply and innovation.

That we lack a fully free market today does not substantially change the analysis. We can be confident that government intervention makes medical care artificially expensive by imposing artificial costs, restricting supply, and stimulating demand. A ban on global price discrimination would hardly help improve things. We'd have fewer new drugs. (Watch Alex Tabarrok and Robert Murphy discuss this and related issues.)

This case against Trump's executive order is valid even when we acknowledge that foreign buyers of American drugs are governments that impose price controls. As many have pointed out, importing other countries' price controls makes no sense.

No discussion of drug prices is complete without noting the burdens imposed by the Food and Drug Administration (FDA) and the patent system. Bringing a drug to market costs upward of $2 billion, and most never make it. Private competitive testing and certification firms (analogous to Consumer Reports) could replace the FDA and the prescription requirement. With informed consent, people should be free to take medicines that have undergone different degrees of testing. Life is risk. The government can't change that.

Regarding the patent system, while 15-year monopoly pricing to some extent offsets the FDA burden, it should be abolished along with that agency. Because of vigorous competition, Americans pay far less for out-of-patent generic drugs than the rest of the world. Intellectual property is inconsistent with property rights because it prohibits manufacturers from using their own physical property to produce things. Unlike finite physical property, ideas aren't properly ownable: when an idea is communicated to others, the first person still retains it. Its economic value may fall, but no one has a property right in a thing's market value. For those who fear that the end of drug patents would spell the end of innovation, see Michele Boldrin and David K. Levine's Against Intellectual Property, which has a chapter on the international pharmaceutical industry.

Trump's plan to tamper with drug prices will reduce profits to "Big Pharma"—ooh, what a scary term!—impede innovation, and make everyone less healthy in the future. Drugs currently under patent may seem expensive, but as Tabarrok points out, many modern drugs reduce the need for more costly and dangerous surgeries, and most drugs are paid for through insurance policies. (The government also makes insurance artificially expensive through mandated coverage and discriminatory tax treatment.)

Moreover, as Tabarrok says, Americans get new drugs first. So, all things considered, drug prices don't look so bad after all. The moral and economic case for freeing the market is watertight, but that doesn't mean what we have now is worthless and could not become worse with more intervention. 

America's interventionist medical system must be replaced by a free market in medicine. Most of every dollar spent on medical care today is paid for or mandated by the U.S. government. Barack Obama's Affordable Care Act made a flawed system worse. Coercion, which includes medical licensing, hospital certification, and official accreditation of medical schools, should be eliminated because nothing has proved better at delivering goods and services than the competitive profit-and-loss system directed at consumer satisfaction.

Natural Economic Law Can't Be Repealed

If the government restricts supply and subsidizes demand, out-of-control prices, resource shortages, and unpleasant ad hoc coping restrictions will follow. That is the natural (economic) law. The government cannot repeal it. But it can stop its attempt to plan.

The Health-Care Nirvana Fallacy

Someone explain how coercive centralized bureaucratic control of medical decision-making and the purse can beat the decentralized free market with its undistorted price system. The government has many things besides medical care it wants to spend tax money on, and seemingly free medical care leads to unlimited, unmanageable consumer demand for services. What then? Will the bureaucrats never say NO to many people who need or say they need care? Where will the money come from? Will there not be intolerably long and life-threatening queues for exams, tests, and surgeries? Will doctors work for low reimbursements or be drafted? Aren't resources and labor limited and consumer demand unlimited? Someone square the circle for me.

Many people imagine a perfect medical system in which everyone can have everything he or she wants for the asking and without inconvenience. Nothing can compare to perfection, so case closed. This is the Nirvana Fallacy, judging the possible against the perfectly impossible. The government has steadily made the medical system worse, culminating in the Affordable Care Act (Obamacare) and its distorting mandates, regulations, and subsidies.

In contrast, the competitive, profit-motivated free market would expand the number of practitioners (now limited by government rules) and improve the quality and variety of services. It would create consumer price sensitivity (services would no longer appear to be free) while cutting prices through competition and increased services. As the price of medical care came down, so would the price of medical insurance, which would also be unencumbered by political mandates for coverage whether people want it or not. People would find it worthwhile to reserve insurance for catastrophic events only, covering predictable routine matters through their savings. 

This is as good as it can get in a world of scarce resources and unlimited consumer wants.

Time to Separate Medicine and State

The "progressive" coverage of United Healthcare CEO Brian Thompson's murder has an unspoken premise: namely, that we could have had a system in which medical care was instantly superabundant and free for everyone. There is no such system. We live in a world of scarcity. Socialized medical systems limit or deny care because of resource and government-budgetary constraints, and they impose high and even lethal costs through long waits for tests, surgeries, etc. Our government-saturated system is a nightmare, to be sure, but more government control would make things even worse, as Obamacare demonstrates.

It's time for the free market.

TGIF: The Mythical Right to Medical Care

This clever video juxtaposes footage of Bernie Sanders and the late Milton Friedman to create a debate over whether the central government should take over medical care in America. Sanders condemns as a "national disgrace" the lack of a medical care guarantee for all -- rich, poor, and in between. Medical care, he insists, should be "a right of citizenship." Then, echoing someone in the audience, he changes that to "health care is absolutely a human right."

The remarks by Friedman from the '60s and '70s chosen for the video address the efficiency problems with government-run medical services, including the inevitable restrictions on consumer choice. Politicians and activists may feel good when they passionately declare that the government should guarantee all people medical care. Unfortunately, such declarations neither create nor deliver quality care justly or efficiently. Friedman was a long-time advocate of the separation of medicine and state. In his 1962 book, Capitalism and Freedom, he called for, among other things, the end of medical licensing, and he defended that view in these recorded remarks before a group of presumably uncomfortable doctors at the Mayo Clinic.

Since Friedman spoke as an economist, not a political philosopher, in his remarks, I thought I'd say something about the rights issue that Sanders raises. To pick a nit: Sanders needs to make up his mind. Is medical care a right of American citizenship or a human right? I don't see how it can be both. The term human right suggests universality, while a right of American citizenship does not.

But let's leave that and look at this purported right. The first thing that occurred to me is that this "right" doesn't match its billing. Medical care is not like air or water; it doesn't appear naturally. On the contrary, the many services and products that constitute medical care must be created through human effort.

This ought to pose a problem for the right-to-medical-care set. A declared right to medical care would camouflage something even more ominous: a right to the labor of doctors, nurses, technicians, developers of medicines, inventors and producers of medical devices, and so on.

That raises a question: do those people have a say in the matter? If the answer is yes, then there goes the purported right; they would be free to decline to go along. But if the answer is no, they are no longer free people, but slaves. Don't we all agree that slavery is bad? (Well, almost everyone. Slavery still exists today, including in Libya, thanks to the U.S.-led regime change in 2011, and many other places. The number of slaves today is larger than in previous times, but it gets nowhere the attention still given to American slavery, which was abolished 158 years ago.) Abraham Lincoln correctly said that "if slavery is not wrong, nothing is wrong." It follows that if self-ownership -- the opposite of slavery -- isn't right, nothing is right.

Is Sanders calling for slavery?

No, no, he and his allies will protest. No one is talking about slavery. No one wants anyone compelled to produce medical services and products. (I'm not entirely sure about that. Would they not endorse conscription for doctors if enough of them opted out of Medicare and Medicaid because of the bureaucratic intrusions?)

If they don't favor slavery, what do they mean? They mean that the government should guarantee payment for medical services for all. (As if the government would pay for something without dictating terms.) But how can the government guarantee payment? Society's medical bill is huge (partly because of government intrusion on both the supply and demand sides), and politicians and bureaucrats certainly don't personally have that sort of money. So they'd have to get it from somewhere else, and we know where that is: the pockets of the people living in America. All that politicians and bureaucrats can do is rearrange existing wealth according to their own preferences. (Actually, it's worse than that; by intervening, they impede the creation of new wealth and innovation in the medical field.)

One way or another, the government would have to transfer wealth from the people who create it to bureaucrats. If the chosen method is taxation (and if it didn't create a tax revolt), the transfer would be straightforward. The dollars the government takes and spends are dollars surrendered under duress by the individuals who earned them. Okay, taxation is not slavery, but it is extortion.

On the other hand, if the government borrows the money, the Federal Reserve would monetize the debt by inflating the money supply, driving up prices (and distorting the structure of production). Depreciation of the money would constitute a transfer of purchasing power from consumers to bureaucrats. That's just a hard-to-see form of taxation. (By the way, without the power to tax, the government would be unable to borrow.)

Sure, everyone theoretically would eventually get some kind of medical attention (if they lived long enough; you know how government monopolies are), but would the system be worth it in terms of lost liberty and utility? It's not as though free people wouldn't arrange for decent medical services, insurance, mutual-aid associations, and philanthropy if liberated from government domination. (Bulletin: we don't have a free medical system.) 

Sanders and the Medicare-for-all brigade endorse an untenable situation in which two or more sets of people are in a conflict over the same money: those who earned it and those whom the legislators and bureaucrats claim to be serving. We ought to be able to agree that they can't both have a valid claim to the same money. (How could the earners, who include entrepreneurs, business owners, managers, and employees, not be entitled to their earnings?)

For a rights theory to do its job -- which is to define the moral-political zone in which each individual can act and flourish in peace -- rights must be mutually consistent, or compossible, as the political philosopher Hillel Steiner puts it. That means the test of any rights theory is this: could all people exercise their rights simultaneously without conflict? Under classical-liberal natural-rights theory, they could. Under the progressive theory, they could not. Thus the progressive theory fails.

Sanders's view would eviscerate the Lockean principle that each person is an end in himself and not merely a means to other people's ends. Sanders & Co. effectively repudiates self-ownership and the rights to life, liberty, and the pursuit of happiness, which is really a single right: the right to be free from aggression.

No right to medical care exists. Everyone has a right to engage in peaceful and consensual cooperative activities aimed at obtaining medical care. But a right to medical care per se? No way, not if we value liberty -- and quality medical care.