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.