Question

How can regulation of pharmaceutical drug prices improve social welfare?

Answer 1

Increasing pharmaceutical spending has increased demands for controlling pharmaceutical markets by placing restrictions on pharmaceutical costs, income or overall spending. The likely effect on social welfare of such regulations is a contentious and much debated public policy issue. Regulations, on the one hand, curb spending and thus potentially improve the welfare of current generation. On the other hand, such regulations limit research and development ( R&D) incentives and thus could hurt future generations by reducing the pace of innovation.

Thus, pharmaceutical legislation entails a possible trade-off between nowadays curbing prices and providing less medications to support current and future generations. The first step in examining this trade-off is therefore to estimate the impact of the regulations on pharmaceutical revenues. There is little consensus, though, as to whether or not real-world pharmaceutical regulations impact revenues. Some believe these regulations have little "bite," particularly with the passing of time, as pharmaceutical companies learn to work around them. Others believe regulations have great repercussions on revenues and consequently limit the pace of innovation.

The US is exceptional in that it does not regulate or negotiate new prescription drug prices when they come onto the market. Other countries will commission a government agency to meet and haggle at an appropriate price with pharmaceutical companies. Typically, these agencies will make decisions about whether these new drugs represent any enhancement over the old drugs whether they're even worth bringing to the market first. They will brag about reams of evidence about the risks and benefits of drugs.

That decision comes with, no doubt, political trade-offs. Countries such as Australia will often refuse to cover drugs they don't think the price is worth. To be able to leverage regulatory agencies in negotiating with drug manufacturers, they have to be able to say no to the drugs they don't think are up to snuff. This means that certain drugs that are sold in the U.S. are not available in other countries and often there are public outcries when those agencies refuse to approve a given drug.