What does it take to get vital medical care in America? For Laura Matson, a Type-1 diabetic, it took upending her whole life. To pay for her insulin treatments, she had to sell her car and furniture, relocate, and even give away her dog Nicky, as the
BBC reported. And she isn’t alone. Many Americans struggle to make ends meet as their health care costs rise.
These rising costs are strange, in a sense. The prices of other consumer goods—nutritious food, digital devices, clothing, etc.—generally fall as technology advances and production becomes more efficient. Why is health care such an exception to this rule?
After all, most of the medications Americans take are made of relatively simple ingredients. And once treatments are established, drugs cost very little to produce. Insulin itself is a century-old technology. So why are Matson’s insulin treatments so expensive?
Sen. Elizabeth Warren (D-Mass.) blames corruption. At a recent Democratic debate, Warren
said:
“Who is this economy really working for? It’s doing great for a thinner and thinner slice at the top. It’s doing great for giant drug companies. It’s just not doing great for people who need a prescription filled ...
When you’ve got a government, when you’ve got an economy that does great for those with money and isn’t doing great for everyone else, that is corruption, pure and simple. We need to call it out. We need to attack it head on. And we need to make structural change in our government, in our economy, and in our country.”
To an extent, Warren is right: Corruption is the problem. The pharma-to-patient pipeline is clogged with it. What she leaves out is the key role that government
regulation plays in that corruption.
How Regulation Makes Health Care More Expensive
Regulation in the health care industry drives up prices for patients in many ways.
The Food and Drug Administration’s
approval system requires
billions of dollars and nearly a decade to navigate. This strangles supply by hampering production and constrains competition by preventing smaller companies from entering the market. And as Economics 101 informs us, lower supply and less competition mean higher prices.
“Even though insulin treatment itself can’t be patented, improvements in delivery mechanisms can be. These incremental improvements, no matter how small, can be used to extend the 20-year patent on a drug, a process called “patent evergreening.” Sanofi has filed
74 patent applications on its long-acting insulin Lantus—nearly all of them after the drug was on the market—and boxed out generics for decades. Drug makers seek extensions to their exclusivity when they add pill coatings and alter inactive ingredients, extending their monopoly but offering no marginal advantage to patients.”
At every stage where regulation narrows the choices available, patients lose. Life-saving treatments become harder to access and more expensive.
To return to Matson, regulation drove up the cost of her insulin treatments by limiting competitive market innovation at every opportunity. A generic version of a drug or insulin injector pump can drop the price by up to 90 percent, but the government
blocks generics. Nearly identical, perfectly
safe insulin products can be bought from Canadian drug makers, but imports are illegal. Heavily regulated insurance issuers are legally limited to a handful in each state, and each plan reimburses only some brands.
Pharmacies could dispense treatments popular in the 1990s for pennies, instead of the expensive, cutting-edge tech. Matson might have been willing to test her blood sugar more than once a day with tedious strips or deal with the hassle of vials and needles if it meant she could keep her apartment and her beloved dog. But regulations deny her that choice.
Patients Lose—So Who Wins?
If you want to understand any regulatory scheme, ask yourself, who benefits from it? Policymakers may have pitched the rules as protections for patients—indeed that may have been the sincere intention of some. But clearly, the system doesn’t benefit Matson or others like her. When a dirt-cheap, exceptionally common prescription like insulin keeps getting more costly while everything less regulated becomes less expensive, the regulations are standing in the way of progress.So if not patients, who benefits?
The executives and shareholders of big, established pharmaceutical companies certainly do. They hold the valuable patents that prevent generics competitors from underselling them. And Food and Drug Administration (FDA) compliance costs may hurt their bottom line, but they are big enough to absorb them, while smaller would-be competitors are not. So regulation creates a barrier to entry—a “you must be this big to ride” bar—that keeps out upstart competitors.
By stifling competition in the above ways, regulation can protect the market share of the big boys, granting them inflated, cushy profit margins, at the expense of patients, who pay inflated, onerous prices for care.
Of course, FDA bureaucrats benefit, too: A lengthy approval process provides them
highly paid jobs. And for many of them, the gravy train doesn’t stop there. Big pharmaceutical companies often hire former regulators at very generous salaries to help navigate the FDA gauntlet.
Scott Gottlieb was FDA commissioner until just months ago and is now on Pfizer Inc.’s board of directors. Current Secretary of Health and Human Services Alex Azar is a former
Eli Lilly executive.
A
revolving door between regulatory agencies and the companies they’re regulating
creates pressure to be “good for (big) business.” Doing little favors for one another (downplaying an unfavorable trial, tying a competitor up in some extra red tape, delaying the approval of a generic alternative) overrides public interest as
former and future colleagues play a slow, highly profitable game of musical chairs.
The Problem of Regulatory Capture
When regulatory agencies are thus “captured” by big players in the industries they regulate, it is called “regulatory capture.” Regulatory capture runs rampant in highly regulated industries, and it isn’t too hard to understand why.
In a free market, the way to “win the game” is straightforward and fixed: Serve your customers better than your competitors do. But in a highly regulated market, the rules of the game are malleable. This opens a new path to success: Help make regulations that disadvantage your competitors.
Influencing the rules of the game then becomes a big part of the game. Instead of playing better, you can win by calling the referee and getting your opponent thrown out. So gaining sway over the rule-makers and rule-enforcers (regulators) becomes paramount, and satisfying customers less so.
The free-market “satisfy the customer” game has historically been characterized by businesses rising and falling. Time after time, incumbent Goliaths are brought down by upstart Davids. (Think of Netflix busting Blockbuster.) Out of the companies in the Fortune 500 of 1955,
only 52 still ranked on that list in 2019.
But in the regulated-market “cripple your competitor” game, the Goliaths have an extra advantage. With their lobbying budgets and political connections, they are in a better position to capture their regulators and rig the rules of the game in their favor.
Regulatory Power Corrupts
So Warren is right in a sense: Prescription drugs are indeed expensive because of corruption. But that corruption is made possible (and irresistible) by regulation. Power corrupts, and regulatory power is no exception. This isn’t a problem of capitalism, but of cronyism: a symbiotic relationship between big government and big business.
And Warren’s
proposed solutions—further concentrating power with a Medicare for All plan, or letting government agencies oversee production of generic drugs—would only make the problem worse. Imagine the profitability of requiring only name-brand drugs through Medicare; giving regulators more power increases interest groups’ incentives to manipulate regulators instead of serving customers.
The real solution to rising health care costs is less regulatory power, not more. The great disruptors that lower prices and accelerate access—the Amazons and AirBnBs of health care—are out there, but regulation is standing in their way. As long as regulators have the power to exclude products and companies from the marketplace, some businesses will try to game the system instead of upping their game. Less rule-rigging would mean more competition, more services, and lower prices for people like Matson.
Dr. Laura Williams teaches communication strategy to undergraduates and executives. She is a passionate advocate for critical thinking, individual liberties, and the Oxford comma. Dan Sanchez is the director of content at the Foundation for Economic Education (FEE) and the editor of FEE.org, which first published this article. 
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