^{Democracy & Technology Blog} Innovation killer

Economist Larry Hunter, an old friend, zeroes in on the real threat posed by the Medicare Part D prescription drug benefit — price controls. Potential House Speaker Nancy Pelosi doesn’t call them prices “controls” of course. She calls them “negotiations” and says she’ll institute the change in her first 100 hours in office. Hunter reminds us of past intrusions into the crucial information-processing realm of prices:

These “negotiations” would have terrible consequences: They would create shortages, stunt new development, generate red tape, increase government intrusiveness into patients’ health-care decisions and eventually raise drug prices.
The historical record is clear: Price controls always have the opposite of intended effects.
Airfares were higher, not lower, after price controls were imposed in 1938. When price controls were finally removed from the airlines industry 25 years ago, prices fell dramatically.
Price controls imposed to stop skyrocketing inflation during the 1970s were also spectacularly unsuccessful. When President Reagan removed price controls on gasoline, long gas lines evaporated and the price of gasoline fell sharply.

I would add telecom to the mix. Price controls known as TELRIC and UNE-P, disguised as competition promoting mandates, were the key cause of the 2000-2002 telecom crash.
Although the Medicare prescription drug benefit irresponsibly adds large unfunded liabilities to our national balance sheet — maybe as much as $20 trillion — that has not been my primary worry. We are a wealthy nation, and we often ignore the large and growing asset side of the national ledger. The ultimate threat of Medicare Part D is as an innovation killer.

Price controls also would create other huge disincentives for companies to develop new life-saving drugs. Not only would price controls curtail overall research but they also would divert it into less risky and less promising areas — particularly with regard to seniors.
In other words, if drugs that are primarily used by seniors suddenly are made unprofitable by federal decree, the drug industry would lose all incentive to develop new cures for diseases — such as Alzheimer’s — that affect mostly senior citizens. Companies instead would focus on developing cures for which demand is more evenly spread among different age groups.
Such government-imposed distortions would compel the drug industry to shift R&D resources out of the seniors’ market. The end result would be a stealth form of drug rationing to old people.

Larry ominously points out that a crash of health care innovation could lead to nationalization of the entire health care system — just what Pelosi and others really want.
-Bret Swanson