The CREATES Act

Lower drug costs without price controls.

Some American politicians—including, it seems, both Hillary Clinton and Donald Trump—want to reduce the high cost of prescription drugs by imposing government price controls.

But there’s a problem: price controls kill.

Forty centuries of human experience have shown that price controls do not work, and often harm the very people they’re intended to help. The principal effect of price controls is to create artificial scarcity. And when scarcity is inflicted on vital necessities like food, water, and medicine—people get hurt. Price controls kill.

Happily, there is an alternative to price controls: markets. Free markets bring down prices, and improve quality, without harming people. (Appropriately regulated markets, to be sure.)

If you want lower prices, let free markets do what free markets do.

Thankfully, there is a bill pending in Congress that would make prescription-drug markets, if not free, at least a good bit freer.

The CREATES Act (H.R.2212 in the House, S.974 in the Senate) would promote drug price competition by making it easier for medicines whose patents have expired to be sold as less expensive generic versions.

The list of the bill’s Senate co-sponsors includes such famous liberals as Senators Dianne Feinstein (D-Calif.), Richard Durbin (D-Ill.), and Susan Collins (R-Maine), and such equally famous conservatives as Senators Mike Lee (R-Utah), Ted Cruz (R-Texas), and Rand Paul (R-Ky.). At the same time, a broad coalition supports the bill, whose members range from AARP and Public Citizen on the left to FreedomWorks and the Heritage Foundation on the right.

This bill is a no-brainer—and a perfect counter to price controls.

As I mentioned, both major-party candidates for president in 2016 endorsed price controls. Or rather, they endorsed the idea of harnessing Medicare’s massive purchasing power to drive down drug costs for seniors and the disabled. Which, while it may sound good, is really just price controls by another name.

Why? Because Medicare is a monopoly. It has no effective competition. If it were allowed to do so, it could pretty much set its own price.

Well, almost. If it set the price too law, as it likely would try to do, the drug companies would have no choice but to walk away. If that happened, the supply of life-saving drugs for seniors would dry up and innovation would slow down. Basically, the goose that lays the golden eggs would get cooked. We’d have artificial scarcity, a la bureaucracy.

The CREATES Act would take the opposite approach. It would remove barriers to competition by shortening the time between a drug’s going off-patent and the date when competitor products can enter the market.

A patent is a temporary government-granted monopoly—nowadays, it typically runs 20 years. To receive this monopoly, the inventor must disclose his secrets to the public. Once the patent expires, any would-be competitor can take advantage of the published secrets to offer the same invention at a competitive (i.e., a lower) price.

The patent system is a blessing that makes life better for everyone, accelerating innovation today and reducing prices tomorrow. But when patent monopolies are extended beyond their rightful term, prices remain high and patients suffer.

Today brand-name drug makers are exploiting a weakness in the drug-safety laws to prolong their monopolies.

The federal Food and Drug Administration (FDA) requires generic drug makers to prove that a proposed alternative version of a drug is chemically identical to the original and just as safe. To do that, the would-be competitor needs to have, not just the formula for the patented drug, but also samples of that drug, and in sufficient quantities to carry out comprehensive comparison tests. To thwart competition, some drug makers simply refuse to sell the needed samples to their potential competitors, or overcharge for them, or slow-walk delivery.

Without sufficient quantities of the patented drug, no one can meet the FDA safety requirements, and thus no one can legally sell the drug, and thus no one can compete. Which effectively makes the patent perpetual.

A patent is a temporary privilege, not a perpetual right.

To fix this problem, the CREATES Act authorizes the would-be competitor to sue the maker of the patented drug, to compel the latter to provide it with the federally required drug samples at a fair market price within a reasonable time.

Wisely, the CREATES Act takes a light touch. It narrowly authorizes the courts to resolve drug-sample disputes case-by-case, rather than delegating sweeping new regulatory powers to some federal bureaucracy. And it does nothing to weaken the validity of a patent.

But wait. Wouldn’t the government be forcing a private producer to help his own competitors? Yes, but only to the limited extent necessary to enforce the temporary nature of the patent, in individual cases, in order to promote public health and safety.

Remember, the alternative is to let private patent monopolies basically set their own price. To take just one real-world example, in 2015 Turing, which refused to sell samples of its drug Daraprim to would-be competitors, hiked the drug’s sticker price by 5,000 percent, from $14 a pill to $750.

Price controls invariably harm patients. So do unlawful monopolies.

Between these two extremes lies an elegant, bipartisan, and broadly popular solution: the CREATES Act, which would reduce drug prices without harming anyone.

Congress should pass this no-brainer, pronto.

Dean Clancy, a former senior Republican official in Congress and the White House, writes on U.S. health reform, budget, and constitutional issues. Follow him at deanclancy.com or on twitter @deanclancy.


[Originally published at thehill.com, Jan. 18, 2018. @thehill. Republished at deanclancy.com.]

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