Q: should policymakers trust the free market to meet urgent demand for prescription drugs?

Insight on the News, Nov 26, 2001 by Ilana Mercer, Alan Sager, Deborah Socolar

YES: The forces of supply and demand will lead to higher production and lower cost for the drugs.

A coalition comprising roughly 22 U.S. states from the Pacific Northwest to New England has been organized to "bring about fair prescription prices" for people who do not qualify for Medicaid rates. The states are looking for inspiration from Vermont, Maine and New Hampshire, which are in the process of aggressive legislation aimed at explicit price regulation for the benefit of a segment of the voters saddled with out-of-pocket prescription expenditures.

To "extend lower drug prices to people who are ineligible for Medicaid," Maine, in particular, has been extracting discounts from drugmakers by threatening to cap their prices.

The euphemisms for this elaborate wealth-distributing scheme run the gamut from "fair prices" to "discounts" to "rebates." Some representatives even claim that they simply are asserting and experimenting with states' rights. Never one to complain about devolution of powers from Washington to the states, I somehow have a hard time seeing how the doctrine of states' rights extends to using the force of the law to plunder the property of individuals from the pharmaceutical sector.

On the federal level, Tommy Thompson, the secretary of Health and Human Services (HHS), has been setting the pace as far as strong-arming the pharmaceutical industry and tinkering with the economy. Thompson threatened to bust the patent for the anthrax-fighting drug, Cipro, if Bayer AG did not lower its price for its most powerful customer, the U.S. government. The Bayer monopoly price of $4.67 per Cipro pill remains unchallenged. In the absence of generic competition, the product's high price has not forced a voluntary market adjustment on the seller. Bayer's typical rate for the government is $1.77 per pill, and Thompson knocked that price down to 95 cents a tablet.

Thompson's tinkering is intended to bolster the national pharmaceutical emergency stockpiles. The states, for their part, are busy robbing Peter to pay at least 13 million voting Pauls who demand a discount on medication. Tendentious interventionists will depict Thompson and the states as laboring to correct the wayward free market. The truth, very plainly, is that where there is an alleged "market failure," it is safe to say that it is because of government incursion into the economy. The energetic price-fixing and stockpiling from our bureaucrats are ad hoc responses, not to a market deficiency but to deficiencies brought about by ongoing policies of intervention in the economy. Behind the scarcity -- or exorbitant prices of drugs -- is the regulator's heavy hand.

The Cipro addle illustrates the point. The government has been asking Americans not to stockpile the medication but to rely on the government's calculus of probabilities: If the crunch comes, the government promises to be able to treat 12 million people for 60 days of incubation. And never mind that the market has cheaper alternatives.

Only in a command economy does government dictate when the demand for a good has been sated. In a free market, consumers direct supply and demand. And in a free market, increased demand leads to increased supply, as producers compete with one another to satisfy buyers. When the demand for Cipro or any other drag has approximated its supply, buyers -- not the government -- will have indicated their needs have been satisfied. If every single paying American wishes to store a smallpox vaccine or secure a course of Cipro, if only as a psychological antidote, why not? The recent disastrous events have made this particular resource scarcer at the current price because, among other reasons, more people are bidding for Cipro. But even so, Bayer's promise to triple the production of Cipro -- cranking out 200 million tablets during the next three months -- may do little to satisfy a demand driven by almost that many Americans. This is because we do not have an unhampered market.

How would consumer demand have been heeded had the market not been hampered? The same events that hitherto have occurred would have unfolded; the sudden urgent demand for the drug would have been followed by a shortfall of supply. Large demand and short supply initially would send the price of Cipro or any other drag rocketing. At this stage, demonstrators would take to the streets, riding the same old ass and hollering, "Profits equal plunder." Our bellicose collectivists never understand that our very lives depend on the ability of the manufacturer to read and act on vital market signals. Surging profits in an unhampered pharmaceutical market would signal to the many drugmakers that it's time to enter into Cipro production.

All these processes have transpired, save one: Drugmakers are not permitted to respond to one of the street signs of the free market -- profits. Patent law prohibits pharmaceutical companies from competing for Cipro market share, and in the process of satisfying the buyer's demand for it, also creating competition and dealing a blow to the Bayer monopoly price tag.