Pharma Can Live Under Price Controls; Medical Innovation Won’t

Megan McArdle has this to say about the prospects for new prescription drugs in an America in which government manages everything about health care:

Price controls are a feature of national health insurance schemes, just as log-rolling is a feature of democracy. We might hold out for a while. But eventually, we’d have a combination of populists in office and a budget problem, and the pharma profits would go.

And when the profits go, so go the incentives to develop new drugs. Which is not to say that pharmaceutical companies will go away. They will just do what is in their own self-interest, in ways that harm the public’s health:

Right now, pharmaceutical companies spend a great deal of effort on innovation because they have to in order to survive. But if survival means ditching the R&D labs and churning out low-cost copies of things they’ve already invented, then I’m pretty sure that’s what they’ll do. To paraphrase Adam Smith, it is not to the benevolence of pharma that I look, but to its self interest. In the current system, that self interest means inventing new drugs.

In other words, I’m not in favor of business. I’m in favor of competition.

(Cross-posted from State House Call.)

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