Prescription Drug Pricing Pathfinder
ATTEMPTS TO CONTROL DRUG PRICING

In the United States, we generally do not regulate prices. Instead, we rely on a "competitive" model, where prices are kept within reason by market forces. One company can not charge too much for a product or service, because if it does a competitor will charge a lower price.

We occasionally regulate prices when the market cannot be relied upon. An obvious example is monopolies, such as utilities. Most utilities do not compete with anyone (although this is changing in the electricity industry), so there are no additional players to keep costs down. Without price regulation, a monopoly could keep raising its price until the number of people who no longer want or can afford the service is so great that the monopoly is better off lowering prices.

Another example of price regulation occurs where Congress has specifically legislated price controls. This happens very rarely, but one example is insurance rates. The McCarran-Ferguson Act gives states a specific grant of power to regulate the insurance industry, including pricing.

The pharmaceutical industry is an odd combination of a market/monopoly model. There are many different companies in the industry, so the market should keep prices in check. However, the fact that drug companies get a 20-year patent on new drugs means that for 20 years a company effectively has a monopoly on that drug. And that monopoly is not regulated at all, so a drug company is free to charge, in the U.S., "what the market will bear." Generic drugs, which generally sell for a price far below their name-brand equivalents, and competing name-brand drugs are not able to be introduced and thus affect the price of a drug until the patent runs out.

The fact that drug prices do not have an effective price check for the duration of a drug's patent life, combined with increasing demand for and reliance on prescription drugs in American health care, has resulted in a flurry of recent legislative attempts, both at the federal and the state level, to impose some form of price control on prescription drugs.

1. Current attempts to control drug prices

• President Clinton's Medicare Plan
  
• Congressional Bills
• State Efforts
  • Maine
  • Vermont
  • New England Consortium
  • California
  • Other States
    
• Organizations
  
• News Sources
  

2. Potential problems with controlling drug prices

• States may exceed their regulatory authority
  
• States may violate antitrust laws
  
• Price regulation may impair research and development of new drugs
  
• The pharmaceutical industry has tremendous political clout

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