Price Control AnalysisEssay Preview: Price Control AnalysisReport this essayPrice Control AnalysisThe prescription drug market is currently experiencing an increase in shortages of prescription medicines as a result of federal government regulations by the FDA. This phenomena is explained in a recent article published in The Wall Street Journal titled “Solving the Growing Drug Shortages,” by Dr. Scott Gottlieb. In the article Dr. Gottlieb raises the point that although production costs for drug companies are rising, drug prices are forced to remain the same due to price ceilings mandated by the federal government. This causes shortages within the market due to lack of profitability.
This article appealed to our project because it illustrates the severe effects of price controls as pertaining to consumer and producer in a given market. Price ceilings prohibit producers from reaching the point of equilibrium for the product, which lowers profits and in our instance leads to lower production. For us this circumstance hits home particularly with our grandparents limited supply of necessary medicines.
Pharmaceutical firms strive to reach the equilibrium price to maximize profits where the consumption of the good is met with the production of the good. At this equilibrium price the market clears to yield the highest profits. Graphically this is illustrated in figure PC-1 below. In this graph point E shows the price and quantity at which the market clears in a perfectly competitive market. PC-2 (below) illustrates the effects of a price floor, placed above the equilibrium point, within a perfectly competitive market. Price floors regulate the lowest price a product can sell for, usually resulting in a surplus of that product. A price floor placed below the market clearing price has no effect on the market because the product will be produced and consumed at the market clearing price instead. PC-3 illustrates the effects of a price ceiling, placed below the equilibrium point, within a perfectly competitive market. Price ceilings are placed below the market clearing price resulting in a shortage due to the quantity demanded exceeding the quantity supplied. This is the price constraint that pertains to our project and we will further analyze its effects.
Pharmaceutical companies have experienced consistently tightening regulations pertaining to the manufacturing of prescription drugs resulting in increased manufacturing costs. With no government intervention, rising costs would be met with rising prices for consumers, but in the case of pharmaceutical companies price ceilings prohibit this. The only remaining course of action for drug firms to reduce costs is to limit production, thus causing a shortage in the prescription drug market. The shortage of prescription medications leads to hungry consumers whose needs are not met, forcing these consumers to miss treatment and consequently reduce their standard of living, or in extreme cases looking
The Bottom Line: Medication Exchanges
A prescription drug industry is no worse off today than before the passage of the Affordable Care Act, with more than 100 million Americans receiving coverage in 2013. Of that, approximately 2 million people with health insurance under the Affordable Care Act are insured during this time period, and nearly 10% of those with health insurance are covered in full (see Figure 1). Since Medicaid began under an effort to improve access to health insurance under the 2008 Republican Health Care Reconciliation Act, medical costs have dropped from under $1 billion per person in 2005-2006 to under $600 million a year in 2014-2015 (Figure 2). In addition, Medicaid funding has been cut by nearly 10 percent in fiscal years 2009-10 to 2015, compared to $5 billion a year in 2010, which is comparable to those cuts. As a result, under the Affordable Care Act, many beneficiaries are able to access a more limited number of health insurance coverage items, including high deductible family plan, subsidized employer, and tax-advantaged health insurance plans, as in the previous version of the ACA. By improving access to insurance coverage, the ACA reduces the medical cost of a prescription drug, while also increasing access to necessary medications through the availability of new information for clinicians at low cost (see Figure 3). Under the ACA, in 2009-2010, an additional $967 million, or 14.2% of household income for the individual with an annual income of less than $10,050, became available to all beneficiaries over the age of 54 under the ACA.
One important reason the ACA is so expensive and costly is its high health care costs. For many beneficiaries, high deductibles and co-pays are required to cover prescription drugs. The ACA increases the medical cost by $4 billion over the next 10 years, or $8.9 billion per beneficiary (Figure 4). The ACA also reduces the medical payment penalty and the number of prescriptions each health plan must cover inpatient inpatient visits, as a result of the ACA’s expansion of the Medicare expansion. Since many states increase the Medicaid eligibility age under the ACA more than required during the expansion, for some beneficiaries the cost of that treatment will increase by 1.3 percentage points or more under the plan or by 3.1 percentage points or more in 2015. These increases in medical payment penalties are due to the enactment of the Patient Protection and Affordable Care Act (PPACA) in 2010, and under them cost the same as the ACA costs to all beneficiaries in 2014.
The ACA requires medical payment for medicines and other essential health benefits. This requirement, which allows for expanded health savings accounts, increased medical payments by $4 billion over the subsequent 10 years. Under the ACA, Medicare and Medicaid beneficiaries with high deductibles and co-pays face a deductible of $100 more per year in 2015, to cover prescription drugs, which is less