Economic Policy -- Health Care Thesis

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Drugs are an especially significant problem. The high cost of prescription drugs, however, does not just derive from the expertise to develop them. Drug companies receive patent protection for drugs that allows them to charge monopoly rents. This is a distortion in the market, one that the government has determined to be socially favorable. The cost, however, has reached the point where drug costs are also socially unfavorable, particularly if they lead to an erosion of America's credit standing.

Curtailing drug costs may not be politically straightforward, but the economics of it are. The monopoly rents can be capped. Governments in many countries cap drug costs and perhaps the public option is tended to give the U.S. The same power. There may be some quid pro quo for the drug companies -- extending the life of patents, more support for orphan drugs or a streamlined FDA approval process that lowers the costs of development -- but capping drug costs goes a long way to capping the cost of health care. There are other ways as well. A cap with no compromise could be initiated.

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Drug companies will be faced with either accepting lower monopoly rents or finding ways to reduce their costs. Many industries have gone offshore and if that is the fate of the pharmaceutical business then so be it. Pharma isn't going anywhere of course, but by reducing the impact of the market distortion on prices, drug cost increases can be stabilized. Will this stifle innovation? That is debatable, since drug companies can easily adapt to lower profits -- they make those same capped rents in Europe and Canada and still find ways to make money. But even if it did, that is a social cost, not an economic one.

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