How to Fight Prescription Price-Gouging

Outrage at Turing pharmaceuticals is leading to new calls for drug price regulation. Here's how to get a delicate regulatory issue right.

By Nathan Pippenger

On Sunday, the New York Times reported that after acquiring a long-used toxoplasmosis drug, Turing Pharmaceuticals, a start-up, swiftly raised the price from $13.50 per tablet to $750. The ensuing outrage—which, given the pace of social media, might have been pretty fleeting—included one reaction that is likely to keep the story in the news:

The sheer gall of Turing’s move has focused unwanted scrutiny on an industry fearful of greater scrutiny around the issue of prices. Yesterday, amid widespread criticism of Turing, another drug company announced that it was abandoning a similar plan to acquire a tuberculosis drug and hike up the price (from $500 to nearly $11,000 for 30 capsules). This strategy—which the Times describes as a “relatively new” scheme in the pharmaceutical industry—is less a business plan than a disastrously callous form of rent-seeking. Derek Lowe, a chemist and blogger at Science Translational Medicine who has worked in the pharmaceutical industry, writes that Turing’s actions are “horrendous for the reputation of the entire drug industry” and threaten “a serious risk of bringing the entire pricing structure of the industry under much heavier scrutiny and regulation.”

One reason is that Turing’s attempts at justification are transparently bad. It claims that the revenue raised from the higher price will finance new research into improving the drug, a claim which has doctors befuddled: the drug has been used for over six decades, and most experts see little reason to spend on research for alternative treatments. Instead, they worry that the higher costs will put the drug out of current patients’ reach.

On the face of it, there seems to be a strong case here for stricter regulation. But research suggests, in the words of one economist, that “the federal government should exercise caution when attempting to regulate prescription drug prices.” One 2004 study found that price regulation may sometimes lead producers to opt for a delayed launch, or perhaps no launch at all, over one at a low price. A RAND Corporation policy brief concludes that while some forms of price regulation offer a modest benefit to current consumers, they might also “pose substantial risks and potentially high costs for later ones” by reducing new innovation. In another study, an economist simulated the effects of new price regulations in the U.S. and concluded that they could lead to declines in research and development by as much as a quarter or a third.

At first glance, findings like this make the regulatory prospects seem bleak. But it’s not impossible to achieve both medical progress and consumer protection. Even the 2005 study that predicted declines in R&D was agnostic about the overall benefits of such a policy, noting that R&D is just one part of a much more complex assessment of social welfare. And the RAND study which carried similar warnings about a decline in innovation mostly reserved its criticism for only one kind of regulatory approach: price controls. Yes, limits on pharmaceutical revenue may not benefit consumers in the long run. But the goal of consumer protection can be achieved without perverse consequences if, instead of price controls, the federal government acts to reduce drug copays—lowering costs to patients without risking a reduction in new drug development. A new report from the Center for American Progress lists still other options which will likely appear in Clinton’s plan as well.

In other words, even the peculiar features of the pharmaceutical industry are no reason to fear that regulation is bound to fail. There may be even simpler ways to block the most egregious cases of price gouging, like Turing’s—since there can be little R&D-based justification for buying obscure, effective, relatively-cheap drugs which do not require new research, only to jack up the price. When it comes to drug prices more broadly, opponents will loudly raise the specter of reduced innovation. But this prospect is far less ominous if other creative ways can be found to protect consumers. There’s an opportunity for regulatory imagination here, and it will be worth reviewing Clinton’s plan to see what approach she has in mind.

Nathan Pippenger is a contributing editor at Democracy. Follow him on Twitter at @NathanPip.

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