The pharmaceutical companies are learning that sleeping with the
government results in more than the one-night stand they desired.
Legislation to impose price controls on pharmaceuticals purchased
through the 2003 Medicare drug benefit will soon hit the Senate
floor.
Some drugmakers may have to learn a second time. Merck’s early
efforts to mandate use of its new human papillomavirus (HPV)
vaccine could similarly backfire. What government gives with one
hand it usually takes away with another.
In 2003 the Bush administration and GOP Congress enacted the
largest expansion of the welfare state in four decades. It was so
expensive that the Bush administration lied about the estimated
costs and threatened to fire Medicare’s chief actuary if he told
Congress the truth. Even then, the bill passed only after the
Republican leadership manipulated the House rules during a bizarre
early morning vote. No other single action better illustrates the
philosophical bankruptcy of today’s Republican Party.
But the pharmaceutical industry enthusiastically backed the
legislation. Companies foresaw significantly increased sales once
Uncle Sam began purchasing drugs for seniors. Moreover, drugmakers
hoped the measure would buy off politically active retirees. Once
Uncle Sam paid their drug bills, ran the theory, seniors would stop
agitating for price controls, reimportation, and other industry
restrictions.
The capstone of the deal was the so-called “non- interference”
clause, which banned the Secretary of Health and Human Services
from “interfering” with prices, that is, negotiating with the
drugmakers.
Democratic opponents denounced the deal. Rep. Tom Allen (D-
Maine) put it simply: “People in Maine find it incomprehensible
that the Medicare law has a provision that forbids negotiation of
lower prices.” Some Republicans agreed. Only GOP control of
Congress prevented repeal legislation from hitting the floor, where
it would have attracted Republican dissidents.
Today the Democrats control Congress. Rep. Allen proclaims
himself “giddy” at the prospect of Democrats being able to approve
health care legislation. House Speaker Nancy Pelosi made repealing
the “non-interference” provision one of her top priorities. All
that now stands between the drugmakers and federal price controls
is a Senate filibuster, assuming enough Republicans are willing to
commit political seppuku to defend an unpopular industry in advance
of a difficult election, and a presidential veto, uncertain now and
unlikely after January 20, 2009.
The pharmaceutical companies wanted Uncle Sam to buy their
products. Now Uncle Sam is likely to decide how much to pay for
their products.
DESPITE THE SUPERFICIAL APPEAL of negotiated prices, “non-
interference” is good policy. Medicare’s reliance on competing
private insurers has driven costs below earlier estimates.
Moreover, “negotiated” prices would be imposed prices. The federal
government never really negotiates, and possesses a powerful weapon
to bludgeon companies into line: barring sales to 22.5 million
seniors.
Finally, price controls would have a grievous impact on industry
research and development. The major research pharmaceutical and
biotech companies spent $55.2 billion last year on R&D. On
average every new drug costs about $800 million to create.
Drug-making is expensive for several reasons. Companies must
test thousands of substances for every one that makes it onto the
market. Firms must run their products through a lengthy and costly
regulatory process at the Food and Drug Administration. Of those
drugs that are approved, just one in five actually makes money. The
few successful medicines must cover all administration, research,
and sales costs.
Nevertheless, politicians face an enormous temptation to
regulate. They can steal current medicines and give them to
grateful voters. Legislators won’t be around in the future when
drug production lags because companies were denied the return
necessary to support a rigorous R&D program. Moreover, most
people will still blame the industry rather than the
government.
Nevertheless, company executives apparently thought they had a
deal. But no political bargain is forever — especially in the face
of America’s imminent entitlement crisis.
Private competition has driven down the drug benefit’s estimated
cost, but that is the equivalent of the Titanic’s crew
bailing a little faster. America’s financial ship continues to
sink. The pharmaceutical program still creates an unfunded
liability of $8 trillion. That will rise if Congress fills in the
notorious “donut hole,” where benefits temporarily disappear. And
the drug benefit joins federal pensions, the national debt, Social
Security, and the rest of Medicare as part of the tsunami of bills
that will come due as the Baby Boom generation retires.
Thus, many Republicans as well as Democrats find Rep. John
Dingell’s (D-Mich.) argument attractive — that allowing price
negotiation “will deliver lower prices to seniors, lower prices at
the pharmacy and savings for all taxpayers.” The primary victims —
future patients — won’t notice. So the only people likely to
object are drug company executives. The political result is easy to
predict.
SO REPEAL OF THE NON-INTERFERENCE BAN is coming. Maybe not this
year, but soon. And then the fun will really begin.
First, activist groups will besiege the president and HHS
secretary demanding that they ensure that drugs be made
“affordable” to seniors. Many of the retirees the industry thought
it had bought off will bestir themselves and start writing letters
and making phone calls. Members of Congress will rush to the fore,
demanding that the administration make vigorous use of its
“negotiating” authority.
Medicare then will present companies with an offer they can ill
afford to refuse. Here’s what we will pay. If you won’t accept our
generous offer — obviously made with the laudable intent of
ensuring affordable access to drugs for all seniors — then take
your drugs elsewhere. The accompanying press statement will be
released widely.
Companies could say no and blame the government for cutting off
Medicare recipients. But we know how such fight would play out in
practice.
The president would hold a press conference denouncing greedy
drug firms for charging extortionate prices. Congressional leaders
would rail against highly-paid drug executives for putting company
profits before the health of seniors. Groups purporting to
represent workers, consumers, and retirees would concoct junk
studies and churn out press releases insisting that fairness
dictates that the drugs be sold for pennies.
In response, a few industry spokesmen would babble
incomprehensibly about research and development. Then companies
would cave. And investment capital would flee the industry.
WE MIGHT END UP SEEING the same process in microcosm with Gardasil,
Merck’s new drug which protects against human papillomavirus (HPV).
For instance, the Washington, D.C. City Council is now moving
forward to mandate innoculation of young girls with Gardasil, which
obviously will enhance the firm’s profits.
Merck’s strongest de facto ally is health committee chairman
David Catania. But two years ago Catania was attempting to void
patents for and impose price controls on pharmaceuticals. An
amendment to limit Gardasil’s price is a logical next step. If so,
Merck will have no one but itself to blame.
Once Gardasil — a genuinely marvelous product — was approved
by the FDA, Merck began lobbying states to require HPV vaccination
of all girls. Texas Gov. Rick Perry imposed such a mandate by
executive order; the New Mexico and Virginia have approved
legislation requiring HPV innoculation. The District has voted
preliminary approval for a similar measure.
But Merck soon found itself buffeted by a backlash from family
and privacy activists. They resented such a blatantly self-serving
move, especially since HPV is not a communicable disease, but
rather, a result of sexual activity.
Under pressure Merck abandoned its lobbying efforts. But it
remains vulnerable to forces that it helped set in motion. Having
requested government to inflate demand for its product, the firm is
ill-positioned to resist demands that it lower the vaccine’s price.
Indeed, by emphasizing the social importance of mass innoculation,
Merck has made the very argument used by the U.S. government in the
midst of the 2001 Anthrax scare to pressure Bayer to deeply
discount its price for Cipro. It won’t be long before the David
Catanias of the world seize their opportunity to do the same to
Merck.
Pharmaceutical price controls are coming. Of course, Congress
could repeal the drug benefit. Presidents and congressmen could
demonstrate statesmanship and reject Medicare price “negotiation.”
And Martians could visit the earth to dispense an elixir delivering
ever-lasting health, happiness, and peace.
Eventually Congress will approve, and the president will sign,
legislation instructing HHS to “negotiate” drug prices for
Medicare. The result will be bad policy, but will represent a
measure of political justice for the industry. The drugmakers
wanted a government handout; they will end up with price
controls.
Government never joins any enterprise as a junior partner.
Hopefully other businesses will learn this costly lesson before it
is too late.
