The Public Policy

What Happened to Miracle Cures?

Democratic attempts to control drug prices will stifle innovation and lower quality care.

By 2.27.07

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In both the House and the Senate, a measure was recently introduced to "allow American consumers, pharmacists and wholesalers access to Food and Drug Administration (FDA) approved prescription drugs at world market prices."

How? By allowing the re-importation of pharmaceuticals from Canada and other Western nations. As a means to control costs, this approach is mistaken in principle.

There is no "world market price" for drugs because each country is its own market. By blending the US market with the Canadian one we won't lower US prices, we will increase Canadian prices. None of this debate over the cost of prescription drugs really matters in any case as what we should be concerned about is the total cost of care -- drugs, primary and emergency care, chronic and tertiary care.

A little more than a half century ago, Jonas Salk burst onto the scene with a groundbreaking vaccine to eradicate polio in the United States. The vaccine meant that thousands who might otherwise have been stricken down by the deadly disease, or confined to iron lungs in the vast polio wards of hospitals, would now live longer, healthier lives.

When we think of medicine, we tend to remember dramatic changes like Salk's vaccine or Alexander Fleming's chance discovery of penicillin in 1928 -- innovations that saved untold millions of lives, but now belong to a long-gone past of miracle cures. Today, stories about modern health care all seem to be about small, incremental advances, like a cure for male-pattern baldness, a remedy for ulcers, or a marginally improved AIDS treatment.

The impression is that the pharmaceutical industry is stagnant, even as prescription drug prices skyrocket and public health budgets strain under the burden.

Why should we unload our pocketbooks and public treasuries for such small cures?

The simple answer is that the alternatives -- costly emergency room visits and hospital stays -- are often vastly more expensive. Frank Lichtenberg, a professor at Columbia University, is an economist who has devoted a great deal of time to studying the pharmaceuticals industry. In 1996, he found that the numbers of drug prescriptions and hospital bed stays were inversely proportional -- that is, the more that doctors prescribed drugs for treatment, the fewer trips to the hospital their patients required.

On average, Lichtenberg discovered that writing an additional 100 prescriptions would mean 16.3 fewer days in the hospital. And every additional dollar spent on prescription drugs reduces total health care costs by $2.65 in fewer hospital visits.

Yet policymakers often narrowly focus on lowering the bottom line of drug costs. This myopia regularly takes a heavy toll. In 1997, the U.S. Department of Veterans Affairs adopted the National Formulary, a program that sought to control costs by restricting coverage of newer, more expensive drugs in favor of older, cheaper varieties. Lichtenberg reports that "the life expectancy of veterans increased substantially before the National Formulary was introduced…but did not increase, and may even have declined, after."

Or consider this: A 2004 study by the National Bureau of Economic Research found that raising co-payments to reduce the use of diabetes drugs would actually increase overall treatment costs by $235 million. And the New England Journal of Medicine recently reported that, although patients in health plans with capped drug benefits spent 31 percent less at the pharmacy, that savings was wiped out by increases in emergency department and in-patient care.

The same holds true for countless other Americans who suffer from chronic but treatable illnesses. Especially for those of limited means, even a small increase in co-payments on necessary prescriptions can force individuals to cut back on treatment regimens for long-term conditions like asthma, diabetes, or chronic heart failure. When that happens, more -- and vastly more expensive -- visits to hospitals and the emergency room follow.

The main reason health care providers and government bureaucracies make such myopic choices is something economists call "silo budgeting." Bureaucrats and government officials in the health care industry focus on reducing costs in one category -- prescription drug coverage -- without considering how their decisions affect overall costs.

In a health care system where budgets for doctors, hospitals, and drugs are managed separately, it's difficult to justify increased spending on drugs because the overall benefit -- fewer hospital stays -- shows up on someone else's budget.

We ought to be figuring out how to increase, not limit, access to drugs. Broader formularies, lower co-pays, higher drug expenditure allowances, wider access to new drugs, even at the experimental stage.

The good news is that some people are leading the way. The American Journal of Managed Care recently reported that mailing service provider Pitney Bowes lowered out-of-pocket drug costs for workers and family members suffering from diabetes and asthma, with the result that "overall spending among these employees fell by about 12 percent, primarily due to large reductions in [emergency department] use and hospitalizations."

Clearly, it's time our health care providers abandon the penny-wise, pound-foolish practices of the past. We need to make sure our health care plans, both public and private, are designed to give Americans access to the latest cures and the best medicines. Doing that may not capture the imagination the same way that Fleming or Salk did with their miracle cures, but it will achieve results just as dramatic -- lower costs and longer, healthier lives.

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