Politics & Policy

The Fix Is In

House Democrats are price-control freaks.

The 110th Congress has already begun the process of imposing price controls on prescription drugs. On the very first day in session, Democratic lawmakers John Dingell (Mich.) and Charles Rangel (N.Y.) unveiled the Medicare Prescription Drug Price Negotiation Act of 2007. The bill is being rushed to a floor vote on Friday. There will be no public debate, committee hearings, or minority participation.

This is all part of House Speaker Nancy Pelosi’s 100-hour legislative agenda to put her mark on the new Congress prior to President Bush’s 2007 State of the Union address.

Citing the high cost of prescription drugs, Rep. Pelosi has promised to “fix” Medicare Part D in these first few weeks of the new Congress by allowing the government to negotiate drug prices directly with pharmaceutical companies.

Unfortunately, if Pelosi, Dingell, Rangel, and their newly elected colleagues succeed, they will cause irreparable damage to our nation’s health-care system — damage that would affect everyone, not just our nation’s seniors.

That’s because government “negotiations” invariably lead to price controls. And if the federal government sets prices — or institutes a formulary that determines which medicines can be purchased — seniors would likely lose access to the life-saving medicines they need.

As currently written, the legislation would not immediately result in price controls or a single formulary. It doesn’t go so far as to authorize the secretary of Health and Human Services to establish or require a particular formulary.

But this legislation is just the first step down the road to Medicare serfdom. Once the “non-interference” clause is removed, and the government is allowed to meddle in negotiations — which have been handled remarkably well thus far by the private sector — it will be only a matter of tiny legislative tweaks before we see full-blown price controls. That’s Speaker Pelosi’s ultimate goal — and it’s not exactly a secret.

The problem with price controls is they can’t account for the process whereby drugs are developed. Behind each pill’s price tag is time and money that went toward research and development. R&D is a huge investment — on average, about $1 billion per drug.

The market price for drugs reflects these risky investments. Government-mandated prices do not. Quite literally, the difference is a matter of life and death.

University of Connecticut Center for Healthcare and Insurance Studies researchers recently found that since 1960, government interference in drug pricing caused $188 billion in lost R&D spending. That money would have gone to develop new, perhaps life-saving, medicines. These “lost” medicines could have saved 140 million life years.

Currently, the government is barred from negotiating prices by noninterference legislation. However, the researchers predict that should noninterference be repealed, R&D spending will drop by almost 40 percent — producing a loss of 277 million life years.

As the Manhattan Institute’s Benjamin Zycher recently estimated, the amount of money dedicated to pharmaceutical research and development will decrease by $196 billion between now and 2025 if Pelosi and her allies succeed. Considering the average cost of pharmaceutical development, that means about 196 fewer new drugs over the next 18 years. And we would never know if this lost research could have generated a cure for cancer or AIDS or who knows what else.

Government meddling in the marketplace can seriously affect even the drugs that are developed. A 1999 Boston Consulting Group study found medicines take longer to reach patients in countries with price controls. The study noted, “While governments try to achieve the lowest possible price, and companies hold out for a price they will accept, large segments of the population that may benefit substantially from the new treatments are left waiting.”

In other words, while governments and companies haggle, sick people go without the drugs that could alleviate their suffering — or even save their lives. Without the preventative care that medicines can provide, these patients may face costly medical treatment with a much higher price tag than even the newest drugs.

It isn’t even clear that revoking the noninterference clause would save money. The Centers for Medicare and Medicaid Services (CMS) noted that “both CBO [the Congressional Budget Office] and the CMS actuaries have estimated that a centralized drug benefit, with government price negotiation, would not yield lower drug costs compared to current law. Moreover, government controls could restrict access to needed medicines.”

Further, price controls could actually increase costs for taxpayers. The CBO has estimated that striking the noninterference clause would increase the Medicare drug bill’s costs by $18 billion between 2003 and 2012.

In stark contrast to price controls, competition drives prices down and gives consumers more choices. Allowing dozens of companies to compete for seniors’ business gives those companies an important incentive to negotiate better prices for the top drugs. Beneficiaries can pick and choose the plan best suited to their needs.

Troublingly, price-control advocates often tout the Veterans Administration’s drug plan as a model for revamping Medicare Part D. Either they don’t know — or don’t care — that the VA system is so dangerously limited that it appears to halt the life expectancy of veterans.  

Only 19 percent of drugs approved by the FDA since 2000 are listed on the VA formulary, and only 38 percent of drugs approved in the 1990s are listed. That’s why Medicare offers more than 4,300 different drugs while the VA plan offers only around 1,300.

This life-threatening lack of choice is what 42 million Medicare-eligible seniors — and perhaps eventually all of us — would face if lawmakers allowed the federal government to mandate price controls on prescription drugs.

 – Sally C. Pipes is president and CEO of the Pacific Research Institute and author of Miracle Cure: How to Solve America’s Health-Care Crisis and Why Canada Isn’t the Answer.

Sally C. Pipes is the president, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is The False Promise of Single-Payer Health Care (Encounter). Follow her on Twitter @sallypipes.

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