Rent Seeking: Drug Pricing and the Pharmaceutical Industry

I recently came across this article entitled "Centrist Democrats scramble House drug pricing effort" on how three Democrats in the House’s Energy and Commerce Committee blocked a drug pricing plan that was intended to be part of the Build Back Better Act. For context, these reforms would include such measures as having the government negotiate the Medicare pricing of certain prescription drugs and setting the benchmark for these negotiations to the prices paid for the drugs in other developed countries. At first glance, this appeared to be a reflection of the median voter theorem. If we consider that moderate Democrats likely represent and reflect an ideology closer to the median voter than a more left-leaning Democrat, moderates should cast the deciding votes and determine the outcome of policy. However, there was a line in this article that shifted this thought process.

“‘It is disgusting when politicians who supported Medicare negotiation in the past switch their votes in exchange for pharma cash,’ the group Social Security Works said in a statement Wednesday.” This statement shows how this situation is complicated by the rent-seeking behavior of the pharmaceutical lobby, which has already spent over $171 million dollars in lobbying just this year to deter the full enactment of drug pricing policies. In fact, according to the same source, Rep. Scott Peters (one of the three Democrat holdouts) has received the greatest contributions for the 2022 cycle from the pharmaceutical industry out of any House member or candidate. According to Tullock, rent-seeking is when resources are spent to obtain rent which derive from activities that have negative social value. In this case, the millions spent on lobbyists and campaign contributions instead of, for instance, on producing these medicines or conducting research would constitute a misallocation of resources. Further, the scale of their potential “rent” can be seen by how this drug pricing regulation was projected to have generated $700 billion in savings for the government, as stated in the first article. Thus, it seems likely that the percent dissipation will remain low because the total investment in rent seeking by firms appears to still be lower than the total potential rent, even though pharmaceutical companies have spent the largest amount on lobbying out of any industry in recent decades.