The American Spectator

WASHINGTON — The Congressional Budget Office warns that the federal government’s biggest health care programs, Medicare and Medicaid, threaten the nation’s long-term fiscal solvency. The Bush administration acknowledges that its Medicare drug benefit, set to take effect next year, will cost far more than originally projected. Indeed, that program alone will add some $9 trillion in unfunded liabilities.

In order to cut those costs, legislators are proposing that Uncle Sam use his clout — derived from paying for so many drugs — to drive down pharmaceutical prices, creating a de facto system of price controls. Sen. John McCain (R-AZ) called the ban on Washington dictating prices “egregious and outrageous.”

If the government does as Sen. McCain and others desire, Americans could lose their health and even lives as well as their money. Other industrialized countries already are trading the health of their citizens for budget savings. A new Department of Commerce study found that as Asian and European states “seek to reduce spending on drugs through price controls, their collective actions reduce R&D that would provide substantial health benefits to all.” The most obvious losers are people who aren’t getting the drugs that they need.

But foreign citizens aren’t the only victims. The Department figures that overseas price controls are costing Americans between $4.9 billion and $7.5 billion annually by blocking the introduction of three to four new therapies every year. Reports Commerce: “Over the longer term, the benefits for consumers in the United States from deregulation of foreign drug prices and increased R&D would be expected to rise as a result of savings from hospitalization, fewer missed work days, and other medical cost savings.”

Domestic price controls would have even worse consequences for Americans. Simply imposing on Medicare the sort of restrictions now applied to other federal programs, such as VA medical care and Medicaid, warns a new study published by the Manhattan Institute’s Center for Medical Progress, would “reduce investment in R&D and lead to a loss of life and life expectancy of a greater magnitude than has been the case for the past half-century for these types of price controls.”

IT’S COMMON FOR PEOPLE to argue that drug prices are too high. But too high compared to what? Today we take for granted the existence of a multitude of life-saving medicines that didn’t exist even a decade or two ago. Indeed, between 1980 and 2000, 520 new drugs were approved for the U.S. market.

This progress doesn’t come cheap. It takes about $800 million to bring a so-called new chemical entity to patients. Industry R&D rose sharply in the 1950s, then slowed as real drug prices declined and federal regulatory requirements increased in the 1960s. However, explain researchers Carmelo Giaccotto, Rexford Santerre, and John Vernon — authors of the Manhattan Institute study — in an earlier report published by a joint American Enterprise Institute-Brookings Institution regulatory project, “the 1980s witnessed a reversal in the trend with R&D intensity increasing from 8.9 percent to 14.8 percent in 1989.”

The reason was simple: rising prices. The researchers figured that a 10 percent increase in drug prices yielded a 6 percent increase in drug R&D.

We are all enjoying the fruit of that R&D burst. But industry critics seem to believe that we could get all the drugs we want for less money. Just let the government determine prices.

Unfortunately, there is an inevitable trade-off between prices and profits, and research. Report Giaccotto, Santerre, and Vernon: data “show that pharmaceutical R&D intensity changed considerably over the 50-year period, and that the changes in R&D intensity share a striking direct relation with changes in real drug prices.”

That doesn’t mean government should pump up prices — there is no theoretically correct balance between drug abundance and affordability. But government certainly should not bias decision-making the other way.

Unfortunately, however, Washington is incrementally moving towards other industrialized countries, which have nationalized their health care systems and control drug prices as a result. When the Medicare bill goes into effect in 2006, warn Giaccotto, Santerre, and Vernon, “the federal government will be purchasing or paying for nearly 60 percent of all prescription drugs in the United States.”

The measure bars Washington from using its market power to drive down prices. But after the bill’s passage legislators quickly proposed to repeal this provision. Indeed, the original 1965 Medicare Act included a similar prohibition, which was effectively overruled in 1983 when Congress adopted Diagnosis Related Groups for hospital services. Legislators subsequently mandated discount drugs for both Medicaid and the Department of Veterans Affairs.

So long as the federal government is one of many buyers, the market remains generally, if imperfectly, competitive. But when Washington become essentially a monopsonist, that is, a monopoly buyer, then government discounts look suspiciously like price controls.

THE IMPACT ALREADY IS being felt. The Manhattan Institute study found that two factors — “imposition of price controls via the 1990 and 1992 acts and the doubling of government’s share of pharmaceutical spending, from 10 to 20 percent — combined to place a distinct downward pressure on private drug prices.” While the prospect of cheap drugs might excite patients and politicians, Giaccotto, Santerre, and Vernon warn: “it should be immediately apparent that a stark tradeoff exists between greater access to prescription drugs today and pharmaceutical innovation tomorrow.”