With rapidly ebbing enthusiasm, I watched several politicians making speeches this week. I am somewhat shocked to learn that our elected officials evidently do not understand the difference between fiscal policy (actions taken by the independent Federal Reserve) and economic policy (actions and policy set by the president, Congress, and regulatory agencies). Congress can only effect economic policy and seem to have little idea of the effects of such policy. Perhaps this is why Congress, the White House, and the Federal Reserve have so frequently worked at cross purposes for the last two years.
One of the policies that various politicians emphasized was a provision of the Inflation Reduction Act (the name was obviously chosen by the Federal Bureau of Anti-Aptronyms) that will limit the cost of most insulin and insulin-related drugs to Medicare recipients to a maximum of $35 a month.
While I certainly sympathize with those who have diabetes and genuinely wish the cost of insulin were much lower, this new act will not accomplish what Congress desires. The actual result will be: 1. The cost will be transferred to the taxpayer. 2. The availability of insulin will decrease. 3. The measure will not lower inflation but possibly raise it. 4. The cost of insulin will rise.
Let’s take those points in order.
Instead of Medicare recipients paying the full price of insulin, they will now pay a maximum of $35 a month, with the balance to be paid by Medicare. The pharmaceutical companies will be paid a “negotiated” price and the burden of payment will just be shifted to taxpayers. While this may be a laudable goal, inflation is not caused by just consumers spending, but by the total spending going on in the economy, and this includes the government. Since the recipients of this Medicare benefit will have an increase in their discretionary income, their increased consumption of other goods and services will drive inflation upwards.
Inflation is always caused by too many dollars chasing too few goods. It doesn’t matter where the dollars come from—if these conditions exist, the result in a free market is always rising prices.
The bill gives Medicare the right to “negotiate prices” with the pharmaceutical companies producing insulin. Since Medicare will certainly not negotiate higher prices and private insurance companies usually peg their maximum payments to equal those of Medicare, Medicare is essentially setting price controls on the sale of insulin.
Government’s putting a price cap on insulin will inevitably lower production, resulting in an inevitable shortage of insulin. The timing of this new Medicare policy is problematic, as there is already a world-wide shortage of insulin. The rising middle class in emerging nations increasingly has access to more food and enjoys the luxury of a less active lifestyle, which two conditions together result in an increasing number of people with diabetes. Already, more than 20% of the people with diabetes worldwide come from China and India and this trend will certainly increase in the future. Even without price controls, a worldwide shortage in insulin is inevitable.
Even if the shortage did not exist, the lack of free markets and effective methods of distribution means it is all but impossible for enough insulin to effectively reach the growing number of patients needing the medicine in most of Asia and Africa. A good case in point would be a recent study in Mozambique, which showed that even when large quantities of insulin were rushed to the country, over 75% of the supply remained in the capital, resulting in sever shortages in the rest of the country.
Shortages of a product, even without increased worldwide competition for the product, will raise the price of the product. Whether the goods are sold on a black market or sold in markets without price controls, the average price will go up. There are good studies of the effects of government-imposed price controls all the way back to the time of Hammurabi and without exception, attempts by governments to dictate prices result in shortages and higher prices.
What can be done? There are two possible ways to ease an all but inevitable crisis. Government regulation—particularly by the American Food and Drug Administration—could ease restrictions on the creation of competing companies manufacturing insulin. Today, three multinational companies—Novo Nordisk, Eli Lilly and Company, and Sanofi—control 99% of the $21 billion global insulin market in terms of value and 96% in terms of volume. Throughout history, the most effective way to lower prices while increasing quality has been through increased competition. Insulin was discovered 97 years ago, so there is no reason why there should be so few pharmaceutical companies producing the medicine.
Unfortunately, the imposition of price controls will make it even harder for new companies to begin profitable production. The three existing companies producing insulin welcomed the new Medicare regulations since it guaranteed they retained their market share and created massive roadblocks for competition.
The only other possibility of reducing the insulin shortage is through increased medical research, not only for a cure for diabetes, but for a generic version of insulin—something that does not yet exist. Biosimilar insulins are also available but are not yet effective enough to reduce the need for insulin. More money is needed for research and innovation, but the traditional source of such funds (private market investing in order to secure future profit) is impeded by government controls on market prices.
Since it is far easier for politicians to simply claim they have solved difficult problems than actually solving them…. Don’t expect to see the number of diabetes deaths worldwide to drop anytime soon.
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