What is it about bad ideas that make them so hard to kill?
Brilliant inspirations can often be sent skimming across the River
Styx by a sardonic smirk while obviously unworkable schemes often
resemble the Hydra, whom Hercules had so much difficulty
dispatching. The Hydra, you will recall, had the irritating habit
of growing two new heads each time the mythical hero cut off one of
the originals. This unpleasant characteristic is seemingly shared
by the notion, promoted by many progressive health policy types,
that drug costs can be controlled by allowing Medicare to
“negotiate” prices directly with pharmaceutical companies. Every
time a conservative or libertarian economist decapitates some
ludicrous argument in favor of this awful idea, two more
materialize almost immediately.
Another of its ugly heads recently popped up in President
Obama’s Orwellian “Framework for Shared Prosperity and Shared
Fiscal Responsibility.” This budget proposal,
announced on April 13, includes the following verbiage: “The
framework would limit excessive payments for prescription drugs by
leveraging Medicare’s purchasing power — similar to what was
called for by the bipartisan Fiscal Commission.” The commission
called for nothing of the kind, of course. More importantly,
however, is that this is yet another Obama proposal to impose
Soviet-style price controls on a private industry. Because Medicare
is by far the largest single purchaser of pharmaceuticals in the
market, “leveraging” its “purchasing power” is merely euphemistic
language for “we will dictate drug prices.”
Like all price-control schemes, this would inevitably lead
to shortages. If Medicare forces the drug companies to sell their
products at rates that fail to cover costs, these companies will
simply stop manufacturing those drugs. To counter this inconvenient
reality, the supporters of Obama’s approach to “cost control” point
to the Veterans Health Administration (VA), which has negotiated
directly with pharmaceutical companies for years. What such people
usually fail to mention is that the VA covers far fewer drugs than
does Medicare. As health care economist Austin Frakt
puts it, “The VA’s national formulary covers 59% of the top 200
drugs while Medicare PDPs cover between 68% and 93% of those drugs,
averaging about 85% covered. So, if Medicare plans looked more like
the VA, a lot fewer drugs would be covered.”
The reduction in the number of drugs available to seniors
is only the beginning of the harm that would be caused by Obama’s
scheme. Even deadlier will be its stifling effect on innovation. As
Sally Pipes writes,
“Developing just one new medicine costs a drug company nearly $1.5
billion.… If investors fear that Medicare will refuse to cover new,
expensive treatments, then they’ll simply refuse to fund the
research and development needed to create new drugs.” This point is
dismissed by progressive “experts” like Maggie Mahar, who
sneers, “[This] is an old argument. Innovation is already
slowing at drug companies as fewer new ‘game-changing’ drugs are
approved each year.” That this reduction in approvals may say more
about bureaucratic inertia at the FDA than drug company creativity
seems not to have occurred to her.
Ironically, one of the most eloquent rebuttals to this
progressive talking point has been made by fanatical Obamacare
supporter Andrew Sullivan, who
credits profit-driven innovation for saving his life: “I was
told in 1993 that I had a few years to live. I write this 16 years
later with a stronger immune system than I have ever measured
before.” Sullivan is, of course, referring to the discovery that he
was HIV positive. Yet, despite his affinity with the positions of
people like Mahar, Sullivan readily understands what saved him:
“America’s much-maligned healthcare system did this. Without this
vast and free market in medical care and pharmaceuticals, without
the potential for making large amounts of money… the innovation of
treatments and regimens would never have occurred at the pace it
did.”
Unfortunately, the President’s antipathy toward the free
market is such that even Sullivan’s powerful story wouldn’t give
him so much as a second thought about moving forward with his plan
to leverage Medicare’s purchasing power against the drug companies.
Obama does, however, face a couple of legal obstacles. When
Congress expanded Medicare to cover prescription drugs, the law
explicitly prohibited the government from the kind of direct
negotiating proposed by Obama. And Obamacare contains no provision
that negates that proscription. The Democrats originally intended
to include a mechanism for Medicare to “negotiate” drug prices in
the Patient Protection and Affordable Care Act (PPACA), but they
dropped that provision in order to get the public support of the
Big Pharma for the bill.
Which brings us to the only upside of the President’s
proposal. No small amount of schadenfreude is to be had from the
squealing of drug industry representatives. They, like the
leadership of the American Medical Association (AMA), pursued a
quisling strategy on Obamacare in order to avoid this very
contingency. And, like the AMA, they have now been double-crossed.
John J. Castellani, CEO of the Pharmaceutical Research and
Manufacturers of America (PhRMA), is clearly
not amused; “Implementing government price controls in the
Medicare prescription drug program would not achieve better patient
care, sustainably cut the deficit, foster the development of future
medical advances or grow the economy.” Mr. Castellani, like the
collaborators of the AMA, sold out and now complains that the check
bounced.
As satisfying as it is to see the quislings of PhRMA and
the AMA receive their just deserts, the possibility that the
President and his minions at the Department of Health and Human
Services will try to control costs by bullying drug companies into
selling their products at below-market prices is not pleasant to
contemplate. Despite its apparent ability to survive deadly
economic arguments and plain common sense, the notion that Medicare
should “negotiate” prices directly with pharmaceutical companies
remains a terrible idea. Thus, the Herculean task of killing it
once and for all must be continued until the beast is finally laid
to rest.
