The Perils of Price Controls

The Perils of Price Controls

by Richard A. Epstein (Peter and Kirsten Bedford Senior Fellow and member of the Property Rights, Freedom, and Prosperity Task Force)

Why is there a shortage of cancer drugs in the United States? 

Last week in the New York Times, veteran health correspondent Gardiner Harris wrote of the recent sharp and puzzling shortages of critical drugs used for treating a wide range of life-threatening cancers and bacterial infections. The total number of shortages has increased from 58 vital drugs in 2004 to 211 in 2010. These shortages have prompted some wholesalers to hoard certain scarce drugs, which has only aggravated the problem.

 

Harris reports that public officials and policy makers are now anxiously preparing a set of proposals to deal with these shortages. One such proposal calls, not surprisingly, on the federal government to take on a greater role in stockpiling dry ingredients of key drugs, which in times of need could be released to hospitals where pharmacists could then convert them into injectable compounds. A second legislative proposal, introduced by Senator Amy Klobuchar, a Minnesota Democrat, would give the Food and Drug Administration the power to demand that drug companies give the FDA early warnings when they anticipate a cutback in the quantities of goods they ship to the market. Still a third proposal calls for removing restrictions on importing generic drugs from overseas in order to ease the current shortages.

 

One of the real difficulties in understanding these shortages is that they appear to stem from multiple causes. Some shortages come from the failure of various suppliers to meet FDA inspection standards for safety. Other shortages appear to stem from the scarcity of drugs in their cheaper generic forms. Harris says that the FDA attributes this shortage to "capacity problems at drug plants or lack of interest because of low profits." Low profits follow inexorably from price caps. These caps in turn interact with safety issues, creating possible synergistic effects, Let’s tackle each cause of the drug shortages separately, starting with the pricing issues.

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