One of the reforms Speaker-Elect Nancy Pelosi has pushed as part
of her “First 100 Hours” strategy is permitting Medicare to
negotiate the price of prescription drugs. Supposedly this will
save on drug costs for the Medicare Prescription Drug Program. Of
course, Medicare would not actually “negotiate” prices in the sense
of bargaining with sellers. Rather, as the limited drug program in
the Part B portion of Medicare shows, Medicare sets the price for
drugs by only offering to pay for the average price of the drug on
the private market. This sort of “negotiation” will inevitably lead
to a host of adverse consequences, such as diminished choice of
drugs for Medicare beneficiaries, use of restrictive “formularies,”
and reduced research and development (R&D) by pharmaceutical
companies.
While drug-makers and free-market advocates are revolted by the
prospect of government-mandated distribution policies, there will
always be a liberal cheering section. Enter Jonathan Cohn of the
New Republic, one of this group’s loudest
cheerleaders.
Cohn begins his case (sorry, TNR subscribers only) by arguing
that Americans use many drugs unnecessarily. He states that, “Reams
of statistical data suggest Americans are routinely using expensive
drugs for conditions that either don’t need treatment or could be
treated more cheaply with different medications.” He cites the
example of the drug Nexium, a treatment for acid-reflux disease,
that many patients use despite the fact that an older and cheaper
drug — Prilosec — would be just as effective in most cases. The
culprit, Cohn claims, “is the marketing practices of the
pharmaceutical industry, which uses junkets and other
less-than-savory practices to push their wares on doctors while
blitzing the airwaves with TV advertisements to drum up demand
among consumers.”
But surely the pharmaceutical industry is not the only industry
to use promotional junkets. Nor is it the only industry to push
consumers to demand more expensive products. Jaguar, for example,
promotes its rather luxurious cars with some slick ads.
Nevertheless, its cars are easily outnumbered on the road by Hondas
and Toyotas. The difference is that consumers pay for their cars
out of their own pockets, while their prescription drugs are often
paid for, in large part, by a third-party payer such as an
insurance company or government program. When consumers have no
incentive to worry about costs, they will naturally be far more
eager to try new, expensive products. Require consumers to pay
directly a larger share of the cost of their prescription drugs and
they will be far more likely to go with cheaper alternatives such
as Prilosec, regardless of how many free trips their doctors get to
Las Vegas.
This leads Cohn to conclude there is no problem granting the
government the power to restrict access to the drugs seniors can
have. The government “could also create a formulary system, with
lists of drugs for which it would either pay in full, pay in part,
or not pay at all — and base inclusion on price or quality or,
ideally, both.” Additionally,
Drug-makers also caution that, if the government adopts
formularies, they would block access to necessary drugs for
severely ill patients. But private insurers — including the ones
now serving Medicare beneficiaries — use formularies, too. And
studies of the [Veterans Administration] formulary by both the
Government Accountability Office and the Institute of Medicine
found no evidence of access problems.
Actually, the
GAO report did note some problems with VA’s
formulary. It stated that two of the facilities it reviewed had yet
to include about140 drugs that were on the VA’s formulary.
Furthermore, “the approval process for the use of nonformulary
drugs across VA’s health care system does not ensure that all
facilities have an efficient and timely process.” There was “wide
variability in how requests are made, who approves such requests,
and how much time it takes.” Other research shows that the VA’s
formulary may have deadly consequences. Economist Frank Lichtenberg
examined the VA’s practice of using its
formulary to discourage the use of newer drugs, and concluded that
it may reduce the average age at death among VA patients by about
two months.
Studies of other drug formularies have found that costs savings
are illusory. Patients have different reactions to different drugs,
and generic drugs (which are usually preferred by formularies
because they are cheaper) do not always work as well as brand-name
ones. One study (PDF) of HMOs found that the more restrictive
the formulary, the higher the rate of patient office visits,
emergency room visits, and hospitalization, while a study of Medicaid formularies concluded, “Savings in
the drug budget appear to be completely offset by increased
expenditures in elsewhere in the system.” The lesson is clear:
impose a formulary on Medicare patients and Medicare will see
increased costs for doctors’ visits and hospitalization.
Next, Cohn claims that reducing industry profits will have
little to no affect on R&D:
…as [Merrill] Goozner and other industry critics have
shown, the most important basic medical and scientific research
that leads to major medical breakthroughs usually takes place under
government auspices — typically, through grants from the National
Institutes of Health. In other words, taxpayers — not drug
companies — are the ones financing the most important drug
research today. So, even if the pharmaceutical industry did reduce
its research and development investment because of declining
revenues, what we’d lose probably wouldn’t be the next cure for
cancer — it would be the next treatment for seasonal allergies,
and likely no better than the ones we have already.
Goozner’s book,
The $800 Million Pill, is not a systematic
study of the interaction of the National Institutes of Health (NIH)
and pharmaceutical companies, but rather a string of anecdotes.
Some of those anecdotes downplay the importance of pharmaceutical
companies. Consider his account of a drug compound known as
STI-571, which later became Gleevec — a revolutionary treatment
for chronic myeloid leukemia. Groozner focuses almost entirely on
the efforts of university researcher Brian Druker, who pushed the
maker of STI-571, Novartis, to test the drug on chronic myeloid
leukemia. Indeed, without Druker’s indefatigable efforts, Novartis
may never have tested STI-571 on leukemia. Omitted, however, is the
fact that Novartis spent years developing STI-571, albeit in an
effort to treat other kinds of cancers. What are the chances that
Novartis wouldn’t have bothered to invest in STI-571 if it had had
a small R&D budget? Thankfully, we’ll never know.
Furthermore, a systematic study
conducted by the NIH suggests that the NIH’s role is not as large
as Cohn suggests it is. The NIH funds a lot of “basic research,”
and the study noted that “technologies developed in basic research
laboratories are nascent, requiring extensive further development.”
It is the pharmaceutical companies that fund that further
development. The study also examined pharmaceuticals that had at
least $500 million in sales in the U.S. Of the 47 drugs that met
that standard, the NIH determined that it had involvement in only
four of them. The other 43 included drugs for bacterial infections,
diabetes, hypertension, high cholesterol and Hepatitis C — hardly
mere “treatments for seasonal allergies.”
There is an arrogance, albeit a subtle one, in articles like
Cohn’s. It’s the belief that government bureaucrats and medical
experts are well suited to decide which drugs are best for millions
of patients. Decisions on medical treatment, however, are best left
to a patient and his or her doctor. The evidence shows that the
last thing we need is the heavy hand of government getting involved
in those decisions. Letting Medicare set drug prices is a big step
in that direction.
David Hogberg is a senior analyst at the National Center for
Public Policy Research. He also hosts his own website, Hog
Haven.
