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Arthur Laffer: Here’s how Trump can curb runaway drug prices

Excerpt from Bloomberg:

The affordability of prescription drugs is a growing public concern, as annual drug spending continues to rise year after year. Recent pricing scandals, including the 6,000 percent increase in the pediatric muscular dystrophy drug Deflazacort, along with Martin Shkreli’s 5,000 percent increase in the toxoplasmosis treatment Daraprim, only fuel the public outcry.

On numerous occasions, President Donald Trump has vowed to take action to constrain drug prices. Although the specifics of Trump’s plans to lower prices are reportedly being hammered out as I write, the wrong action could have disastrous effects.

Many of us remember the gas shortages of the 1970s due to price controls. Government price controls will almost certainly inadvertently produce price increases in some markets and drug shortages in others.

Equally as important, misguided interference could undercut the incentives necessary to support a vibrant life-sciences industry. America’s free-market system and investments in basic research through the National Institutes of Health and universities have created the world’s most dynamic innovation engine for medical research.

Government actions designed to lower prices could end up stifling this drug innovation, harming the very consumers the actions were intending to benefit. In my years as a professor and researcher, I have seen first hand what wrong-headed government policies can do to interfere with private market decision-making, and the results are rarely beneficial to the consumer. And in my work as a consultant to pharmaceutical clients over the years, I have found this to be especially true in the prescription-drug business.

As an alternative, Trump could use his deal-making skills to negotiate voluntary pricing restraints in the drug industry. Such restraints would reduce the distortionary effects that inevitably result when the government forces specific cost-control measures in areas that may not be the most efficient places to cut costs. Instead, voluntary pricing restraints would enable individual companies to determine the most effective ways to cut their costs to reduce aggregate drug spending.

Such an approach effectively relies on social pressure to do a better job controlling price increases than any government mandate can.

How would this happen in the pharmaceutical industry? One way would be for the president to appeal to companies nationwide for a commitment to keeping annual percentage price increases in the single digits. There could also be a call to limit the number of times during a year that companies increase their prices. It would be on the pharmaceutical companies to keep these promises, and, if they failed, President Trump could bring to bear significant social pressure.

Read more at Bloomberg

Photo Credit: NIAID cc 2.0

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