Tuesday, June 28, 2022

How Incumbents Capture Price Controls: Example from the U.S. Senate

U.S. Senators are proposing to put both retail and business-to-business price controls on insulin.  The (intended?) result will that be that consumers will pay more, diabetes complications will get worse, and incumbent manufacturers will make more money.

Drugs generally follow a life cycle.  Unique new drugs often command a high price that soon falls sharply as the incumbent faces competition from alternative therapies and/or generics.  Insulin has the same kind of life cycle.  Two biosimilars (essentially a generic version of a biologic, which is a more complicated type of drug) were quickly approved under one of the new approval pathways created by the Trump Administration that helped bring prices down (explained further in my forthcoming Journal of Law and Economics paper).  Seven more biosimilars are in the approval pipeline and will soon be competing with the incumbents.

The incumbents would like to freeze time before those competitors arrive, and Senators Shaheen and Collins are obliging.  While they advertise freezing the retail price at $35 plus inflation, they will also impose price controls on the business-to-business transactions that new entrants use to break into the market (read more about them in Chapter 10 of http://yourehiredtrump.com, or in Chapter 13 of my favorite textbook, or in the analysis by OACT and CBO).  By hindering the entry and diffusion of the new biosimilars, the price of insulin will not fall as it would have, and usually does over the drug life cycle.

Suppressing competition is exactly what I'd expect Big PhRMA to order up on the Congressional menu (again, see Chapter 10 of http://yourehiredtrump.com).  I am less surprised than anyone to again see PhRMA deploy Karl Marx's rhetorical device (he always decried the "middlemen" of capitalism), "This legislation rightly recognizes the role of insurers and middlemen" as they see a PhRMA-protection bill come together.

Consumers will have less choice and pay more as a result of this bill.  Adherence to diabetes treatments will be worse than it would have been if this bill were not getting in the way of competition.  Low adherence is not just a health problem, but a financial problem too as private and public health plans are saddled with additional hospitalization expenses for treating diabetes complications.

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