Price Control Pills - The American Spectator | USA News and Politics
Price Control Pills

WASHINGTON — The Congressional Budget Office warns that the federal government’s biggest health care programs, Medicare and Medicaid, threaten the nation’s long-term fiscal solvency. The Bush administration acknowledges that its Medicare drug benefit, set to take effect next year, will cost far more than originally projected. Indeed, that program alone will add some $9 trillion in unfunded liabilities.

In order to cut those costs, legislators are proposing that Uncle Sam use his clout — derived from paying for so many drugs — to drive down pharmaceutical prices, creating a de facto system of price controls. Sen. John McCain (R-AZ) called the ban on Washington dictating prices “egregious and outrageous.”

If the government does as Sen. McCain and others desire, Americans could lose their health and even lives as well as their money. Other industrialized countries already are trading the health of their citizens for budget savings. A new Department of Commerce study found that as Asian and European states “seek to reduce spending on drugs through price controls, their collective actions reduce R&D that would provide substantial health benefits to all.” The most obvious losers are people who aren’t getting the drugs that they need.

But foreign citizens aren’t the only victims. The Department figures that overseas price controls are costing Americans between $4.9 billion and $7.5 billion annually by blocking the introduction of three to four new therapies every year. Reports Commerce: “Over the longer term, the benefits for consumers in the United States from deregulation of foreign drug prices and increased R&D would be expected to rise as a result of savings from hospitalization, fewer missed work days, and other medical cost savings.”

Domestic price controls would have even worse consequences for Americans. Simply imposing on Medicare the sort of restrictions now applied to other federal programs, such as VA medical care and Medicaid, warns a new study published by the Manhattan Institute’s Center for Medical Progress, would “reduce investment in R&D and lead to a loss of life and life expectancy of a greater magnitude than has been the case for the past half-century for these types of price controls.”

IT’S COMMON FOR PEOPLE to argue that drug prices are too high. But too high compared to what? Today we take for granted the existence of a multitude of life-saving medicines that didn’t exist even a decade or two ago. Indeed, between 1980 and 2000, 520 new drugs were approved for the U.S. market.

This progress doesn’t come cheap. It takes about $800 million to bring a so-called new chemical entity to patients. Industry R&D rose sharply in the 1950s, then slowed as real drug prices declined and federal regulatory requirements increased in the 1960s. However, explain researchers Carmelo Giaccotto, Rexford Santerre, and John Vernon — authors of the Manhattan Institute study — in an earlier report published by a joint American Enterprise Institute-Brookings Institution regulatory project, “the 1980s witnessed a reversal in the trend with R&D intensity increasing from 8.9 percent to 14.8 percent in 1989.”

The reason was simple: rising prices. The researchers figured that a 10 percent increase in drug prices yielded a 6 percent increase in drug R&D.

We are all enjoying the fruit of that R&D burst. But industry critics seem to believe that we could get all the drugs we want for less money. Just let the government determine prices.

Unfortunately, there is an inevitable trade-off between prices and profits, and research. Report Giaccotto, Santerre, and Vernon: data “show that pharmaceutical R&D intensity changed considerably over the 50-year period, and that the changes in R&D intensity share a striking direct relation with changes in real drug prices.”

That doesn’t mean government should pump up prices — there is no theoretically correct balance between drug abundance and affordability. But government certainly should not bias decision-making the other way.

Unfortunately, however, Washington is incrementally moving towards other industrialized countries, which have nationalized their health care systems and control drug prices as a result. When the Medicare bill goes into effect in 2006, warn Giaccotto, Santerre, and Vernon, “the federal government will be purchasing or paying for nearly 60 percent of all prescription drugs in the United States.”

The measure bars Washington from using its market power to drive down prices. But after the bill’s passage legislators quickly proposed to repeal this provision. Indeed, the original 1965 Medicare Act included a similar prohibition, which was effectively overruled in 1983 when Congress adopted Diagnosis Related Groups for hospital services. Legislators subsequently mandated discount drugs for both Medicaid and the Department of Veterans Affairs.

So long as the federal government is one of many buyers, the market remains generally, if imperfectly, competitive. But when Washington become essentially a monopsonist, that is, a monopoly buyer, then government discounts look suspiciously like price controls.

THE IMPACT ALREADY IS being felt. The Manhattan Institute study found that two factors — “imposition of price controls via the 1990 and 1992 acts and the doubling of government’s share of pharmaceutical spending, from 10 to 20 percent — combined to place a distinct downward pressure on private drug prices.” While the prospect of cheap drugs might excite patients and politicians, Giaccotto, Santerre, and Vernon warn: “it should be immediately apparent that a stark tradeoff exists between greater access to prescription drugs today and pharmaceutical innovation tomorrow.”

The researchers figure the forgoing regulation cumulatively cut R&D by $188 billion through 2001. That cost 140 million life years and, depending on how one values human life, up to $21 trillion.

Had government more consciously restricted prices, say limiting drug prices to the consumer price index in 1980, between $265 billion and $293 billion of R&D would have been lost–almost one-third of actual industry expenditures. That would have knocked 330 to 365 drugs out of the market, with huge economic and human losses.

Transforming Medicare into a price control system would generate even higher costs. Say Giaccotto, Santerre, and Vernon: “The impact of price controls on Medicare drug purchases would be significantly greater in a much shorter period of time because they are deeper and because they would affect a larger segment of the pharmaceutical market and would send a negative signal to the hundreds of biotechnology firms that as yet have no revenues and that rely upon venture capital and pharmaceutical firm investment to sustain R&D activities.”

The researchers figure the result would be a $372 billion or 40 percent drop in R&D outlays. That would mean a loss of 277 million life years.

How much should drugs cost? There is no right answer. Government will inevitably influence the marketplace, if nothing else through moral suasion and the possibility of political action.

Far worse, however, would be for government to promote price controls, whether enacted formally by legislation or implemented informally through market control. Warn Giaccotto, Santerre, and Vernon: “While the federal government’s success in exerting downward pressure on real drug prices may have benefited consumers in the short run, because lower drug prices improve access to existing pharmaceuticals, this influence has undoubtedly come at the cost of reduced levels of pharmaceutical innovation.”

The Medicare drug benefit has set a dangerous trap, tempting Washington politicians to try to force the pharmaceutical industry to provide more drugs for less money. Alas, there ain’t no free lunch, whether in pharmaceuticals or life. If the federal government regulates drug prices, Americans will pay with their health and lives.

Doug Bandow
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Doug Bandow is a Senior Fellow at the Cato Institute.
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