Regulation Failure Is a Field, Not a Hole

An inherent problem with price fixing identified in basic economics is that we tend to see the proximate results of forced changes on the system, but not the more systemic results.  Moreover, fixing prices prevents us from addressing the underlying difficulties that drove them up or down in an undesirable way.

The same is true of regulation, which (it doesn’t take much work to observe) is true in this New York Times article “Scant Oversight of Drug Maker in Fatal Meningitis Outbreak”:

“How does this happen?”

The answer, at least in part, is that some doctors and clinics have turned away from major drug manufacturers and have taken their business to so-called compounding pharmacies, like New England Compounding, which mix up batches of drugs on their own, often for much lower prices than major manufacturers charge — and with little of the federal oversight of drug safety and quality that is routine for the big companies.

The article goes on to explain that the pain-relief drug that appears to have been contaminated is of questionable benefit to patients.  Nonetheless, there is clearly demand for it, particularly among Medicare recipients.  That had predictable economic effects when two manufacturers of generic products stopped making the drug for regulatory reasons:

Teva halted production in 2010 when it temporarily closed its Irvine, Calif., factory after receiving a warning letter from the F.D.A. about manufacturing quality problems.

The other manufacturer, Sandoz, stopped selling the product in the United States this year, according to the company, which would not provide a reason. Sandoz has also been reprimanded by the F.D.A. for manufacturing problems.

While the F.D.A. says the drug is not in short supply, the brand name product still available may have been considered too expensive, prompting some medical practices to turn to compounding pharmacists.

The call from big-government advocates is clearly implied in the Times’s article — namely, to loop compounding pharmacies into the regulatory fold… at least the larger ones.  A purely free market analysis, by contrast would point out the proximate costs of this failure (seven deaths and 57 illnesses, thus far) and argue that the offending company is likely to go out of business and to stand as a warning to compounders, doctors, and patients alike.  The effects of driving up the costs of all drugs, or making them more difficult to acquire in some other way, through new regulations could be far more detrimental, the argument would go.  We just have no way of estimating those costs.

Without taking one of those positions, one can propose that there are two basic approaches.  The first is to layer on new regulations and, as necessary, subsidies or price fixing that makes the products affordable, in an attempt to use government to perfect the marketplace.  The second is to look to the causes.

Why is there demand for an expensive drug-based procedure that doesn’t have a clear benefit?  (Medicare’s disguising the price for consumers likely has a role here.)  Were the regulations that eliminated the two generic companies absolutely necessary?  Is something impeding research into a new drug or procedure that would be both more effective and less expensive?

When first we acknowledge that regulation is almost never a matter of allowing government to do the obvious, it begins to become clear how easy it is to fall into the trap of chasing our own tail, oblivious to the damage that we cause in the process.