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.
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