Thread by @mfcannon

Tremendous respect for @TomasPhilipson; lots of issues with his latest in @WSJopinion.

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wsj.com/articles/medic… #CatoHealth

First, some background.

Congress has complete control over the prices Medicare pays for drugs.

By most accounts, it sets drug prices too high. It agrees to pay drug makers whatever they charge for 6 categories of Part D drugs, encourages excessive drug prices in Part B, etc.

The policy mechanisms that produce those prices were not efforts to achieve the optimal quantities of QUALYs or innovation or anything so noble.

They were political compromises Congress enacted to make the drug industry happy. So one should not assume current prices are optimal.

Along come @TheDemocrats, who say those prices are excessive. Their Inflation Reduction Act tries to reduce the prices Medicare pays for some, mostly blockbuster drugs.

@TomasPhilipson and the @GOP call those measures "price controls" that will cost lives by reducing innovation.

IMO, for a number of reasons, @TheDemocrats have the better of the argument. TP:

1. Commits a category error in how he uses the term "price controls"

2. Uses that term asymmetrically

3. Uses that term for reasons that swallow his position

1.

What TP labels "price controls" are not price controls in the sense of Congress restricting the freedom of private actors to buy & sell at mutually agreeable prices.

Instead, they are rules that govern how much government pays for drugs. That's a horse of a different color.

Yes, Congress does indeed "set" and "control" what it pays for drugs.

Yet there is a world of difference between Congress deciding how much it will pay (which only restricts individual freedom insofar as it increases taxes) and restricting such freedom for other market actors.

Such government price-setting will have lots in common with actual price controls.

Government (like markets) will often get the prices wrong and (unlike markets) government will not automatically correct its pricing errors.

But if Congress sets these prices too low, enrollees (and others) retain the freedom to go outside Medicare and pay a higher price.

Ergo, IMO, it is misleading to label government price-setting for the purpose of government purchases "price controls" without further explanation.

2.

TP also uses the term "price control" asymmetrically.

Congress has 100% complete control over the prices it pays for Part B & Part D drugs.

Yet TP only uses "price control" to describe the government price-setting mechanisms he opposes, not the ones he prefers.

If the IRA reduces the prices Medicare pays for Part B/D drugs, it will not be because Congress suddenly started setting prices.

It will be because Congress switched from setting *high* prices to setting lower prices.

It is therefore misleading to frame the debate over Medicare drug pricing as a choice between price controls vs. no price controls.

Congress is setting drug prices either way.

The debate is solely over whether Congress should set drug prices higher versus lower.

3.

By reaching for the term "price controls," TP is arguing against his own position.

Price controls have a deservedly bad reputation because government is terrible at setting prices. It gets the prices wrong and doesn't fix its pricing errors.

If you think "price controls" are per se bad, then you should not want Congress to be in the business of setting prices at all. You should want markets to set prices, not government.

An economist who opposes price controls should therefore support any and all efforts to reduce the prices government pays for drugs.

Why?

The closer the government-set price is to $0.00, the more people will go outside the government program to obtain the medications they need.

The closer the government-set price is to $0.00, then, the more markets rather than government will set the prices for drugs.

If @TomasPhilipson opposes government price controls for drugs, therefore, he should support reducing the prices Medicare pays for drugs *far below* what the Inflation Reduction Act would achieve.

I expect TP would object that that would eliminate untold drug innovation and cost countless lives. But that's a problem for the patent system to solve. Solving the public-good problem that drug innovation presents is not why we have Medicare.

Finally, here's a Medicare reform option that @TomasPhilipson might like because it gets Congress out of the price-setting business and that @TheDemocrats might like because it operates on #PublicOption principles: cato.org/outside-articl… #CatoHealth