If you think the government making the drug is a viable solution, there's no need to set prices. If you think the government making the drug is not a viable solution, then you shouldn't set prices for fear of the drug being cancelled.

Could you point out the flaw here?

The government (FDA in this case) doesn't make the medication. They just get someone else to make it. They tell company X "You F'ed Up. Give us all your documentation and we will take it to company Y to make."

I'm trying to remember the name of the company that this happened to. It was like 8 years ago and I think I remember them being a cardiac arrest medical. Anyhow, the company CEO flat out refused the FDA regulators demands that they get their manufacturing process up to standards. The FDA went to another manufacturer (I believe Johnson and Johnson) and asked if they would make the medication and they accepted. The FDA then shut down the prior company.

When lives are impacted, the FDA doesn't mess around. They put CEOs in prison for the crappy decisions they make.

There's a big difference between

"not having a manufacturing process up to standards" and "raising the price insurance companies have to pay".