Politics & Policy

A Price-Control Virus

The new Congress would infect Medicare.

In the 110th Congress’s first 100 hours, incoming House speaker Nancy Pelosi and her Democratic colleagues plan to empower Medicare to negotiate prices directly with pharmaceutical companies. Uncle Sam’s muscle, they argue, will dragoon lower charges from drug makers. Democrats tout the Veterans Administration’s medicine-buying program as their model.


The V.A.’s National Formulary (VANF) is more Model-T than Maserati. Congress should park this vehicle in a junkyard.

The VANF does not involve V.A. officials and pharmaceutical executives cutting deals around a conference table. This is a federal price-control program. The V.A. buys drugs from pharmaceutical companies at the Federal Ceiling Price — a minimum 24 percent discount below the Average Manufacturer’s Price, or the “best price” offered to private-sector purchasers, whichever is lower. Not surprisingly, paying drug suppliers nearly one-quarter below wholesale (or less) generates myriad economic distortions for which patients pay the price.

The vaunted VANF covers some 1,300 drugs, just 30 percent of the 4,300 drugs available on Medicare’s market-priced formulary.

“The V.A. system does not provide a formulary that is comparable in scope to those currently provided by Medicare Part D plans,” Kathleen Hughes, Wendy Watson, and Thomas Goss concluded in their December study for Covance Market Access Services. “The V.A. formulary is more limited both with respect to more popular drugs in general, and with respect to the drugs currently used to treat conditions that are common in the Medicare population such as hypertension, depression, diabetes, and high cholesterol.”

Covance’s paper, prepared for the Pharmaceutical Research and Manufacturers of America, analyzed the 226 drugs most commonly prescribed for Americans over age 65. Of these, Medicare covers 213. VANF includes 165, or just 73 percent, of these agents.

Among 83 high-blood-pressure drugs Covance studied, Medicare covers 81 (98 percent) while VANF includes 66 (80 percent). Medicare covers all 26 anti-depression compounds Covance examined; VANF includes 17 (65 percent).

Medicare also pays for all 13 anti-cholesterol drugs Covance explored; VANF covers just 7 (54 percent). Crestor and Lipitor are among the popular drugs unavailable through the V.A.

Of the 34 anti-diabetic treatments Covance considered, Medicare covers 30, while VANF includes just 15 (44 percent).

Covance found 26 drugs Medicare covers that VANF excludes. These drugs accounted for 264 million prescriptions in 2004. Beyond the reach of V.A. patients, these drugs include Nexium for acid reflux and Alimta, Avastin, and Herceptin for cancer.

It is vital that patients have access to as diverse a pharmacopoeia as possible since, for instance, anti-depressant A might produce frightful hallucinations while anti-depressant B yields sheer bliss. The price-fixed VANF restricts rather than expands patient choice.

VANF also resembles the medicine chest in a long-abandoned house. Its contents may be cheap, but they’re hardly modern. Columbia University’s Frank Lichtenberg discovered in 2005 that V.A.’s formulary includes only 38 percent of the drugs the FDA approved in the 1990s and just 19 percent of those it authorized since 2000.

“New drugs as a matter of V.A. policy are not considered for the V.A. formulary for three years, regardless of improved effectiveness or reduced side effects,” Manhattan Institute senior fellow Benjamin Zycher wrote in the November 29 RealClearPolitics.com. Three years awaiting a new drug may be merely excruciating for Americans with arthritic knees. But for those fighting, say, pancreatic cancer or other aggressive, life-threatening diseases, such foot dragging could prove fatal.

VANF covers some 7 million veterans. Medicare now serves six times as many — roughly 42 million beneficiaries. Retiring baby boomers will swell Medicare’s population to a predicted 78 million Americans by 2030. Thus, flexing Medicare’s monopsony power would restrain drug-company revenues and, hence, reduce the cash they need to develop new drugs — for Americans of all ages.

Zycher forecasts that reshaping Medicare in VANF’s image would chop prices by at least 35 percent by 2025. Meanwhile, “The cumulative decline in drug R & D for 2007 – 2025 would be about $196 billion in year 2005 dollars, or $10.3 billion per year. Because R&D costs for new medicines are about $1 billion, the loss would be about 196 new drugs.”

How much longer would Americans wait for the next Lipitor, Wellbutrin, Viagra, or something still unimaginable? And what if dwindling research funds prevent new treatments from traveling from lab to pharmacy?

Even worse, Zycher calculates, “an annual R&D decline of $10 billion would result in an expected loss of 5 million life-years each year,” or 90 million life-years extinguished through 2025.

Rather than speed the deaths of so many Americans, Congress should approve Rep. Dana Rohrabacher’s (R., Calif.) idea. By commencing a new treatment’s 17-year patent exclusivity when sales begin, not when tests start, a drug company could recover its investment through lower prices across a longer period, rather than higher charges during a shorter interval.

Expanding Health Savings Accounts and strengthening the individual health-insurance market would give Americans more options to accumulate cash for post-retirement drug coverage and expenditures.

And, of course, a stronger economy creates the wealth in which Americans can share, so that drug expenses as a proportion of income decrease even as incomes rise. Rather than tie the drug industry into granny knots, Congress should focus on increasing Americans’ after-tax earnings so people will have more disposable income in the first place. Tax cuts, deregulation, and free trade all advance this objective.

There are at least 100 smart ways to help older and younger Americans buy costly drugs. Making Medicare mirror the V.A.’s drug-pricing jalopy is not among them.

– Deroy Murdock is a syndicated columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution.

Deroy Murdock is a Manhattan-based Fox News contributor and a contributing editor of National Review Online, and a senior fellow with the London Center for Policy Research.


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