Politics & Policy

Free-Market Prescription

An ounce of competition is worth a pound of government.

In January 2006, the federal government began implementing the controversial Medicare Part D program, which pays most or all of the cost of most senior citizens’ prescription drugs, regardless of income level. The program has basically been successful at what it set out to do, providing drugs through competing insurers at low premiums. Between 2005 and 2006, the taxpayers’ burden for drug payments shot up by 35 percent, from $55 billion to $74 billion. American consumers’ out-of-pocket prescription-drug spending dropped only $1.2 billion, to $47.6 billion.

In September of 2006, Wal-Mart rolled out its $4 generic prescription deal, which promised to provide a month’s supply of some 300 drugs (now 361) for less than the cost of a pint of beer. Several other chains — Target, Costco (which is now offering 100 drugs for $10), and Kroger’s, among others — lowered prices in order to compete. Wal-Mart announced last month that its program alone, enacted without any government compulsion, has saved consumers $1.03 billion in less than 18 months. If the other firms’ price reductions are included as well, the total savings could easily be twice as great.

The two phenomena are not strictly comparable. But as presidential candidates ponder an effective government takeover of health care, it is still worth questioning the need for the universal entitlements some are promising. Why should the government create such an enormous liability for working taxpayers if a single pharmaceutical chain can save consumers a comparable amount of money with a gimmicky program that costs the public nothing?

Although it is administered by competing private providers, Part D works like all other universal entitlements: It shifts a large burden from one group (senior prescription-drug users) to an overlapping but different group (taxpayers). It cannot save money — at best, it spreads the pain around. At worst, it adds new inefficiencies and increases costs.

By contrast, a price war between Wal-Mart, Costco, Target, and others costs nothing to the taxpayer. And it produces savings for anyone who shows up and buys a $4 bottle of cyclobenzaprine, prednisone, or warfarin.

A Wal-Mart spokeswoman insisted that the $4 program is not an exercise in public relations or an attempt to lure consumers into their stores by selling drugs below cost. “We’re in the business to make money,” said E. R. Anderson. “I assure you that we’re making money on the 361 drugs on the $4 list.”

“They buy their drugs in bulk,” Robert Moffit of the Heritage Foundation tells National Review Online. “It’s been a great boon for people who need them.”

As Wal-Mart and its rivals fight for consumers’ loyalty, they have taken some pain out of the most common prescriptions — drugs that treat bacterial and fungal infections, pain, asthma, cholesterol, blood pressure, diabetes, and even some mental conditions.

In the grand scheme of things, $1 billion in savings on prescription drugs is a drop in the bucket. American consumers, private insurers, and the government shelled out a combined $217 billion for prescriptions in 2006. Americans and their insurers paid $1.1 trillion for health care out of private funds that year, and federal and state governments paid out an additional trillion.

But the lesson from this tiny segment of the health care industry is worthy of consideration in other health-care matters as well. This is particularly true as Wal-Mart attempts to expand its consumer health care operation with 400 medical clinics in its stores by 2010, in partnership with local hospitals. Such clinics already exist in three cities. They charge just $40 per visit, serving mostly (55 percent) uninsured and underinsured patients with minor ailments, who might otherwise go to an emergency room and be billed for much more.

Medicare Part D, though well-run on its own terms, is an example of how government can spend billions taking over an entire market in exchange for only marginal benefit to the consumer. On the other hand, the price war that Wal-Mart began has already brought about a significant and painless reduction in one segment of consumer health care costs. Its further innovations, and those of its competitors, are likely to continue this trend.

Free markets still work in the few areas of health care where they are allowed to exist — drug prices being one of them. Our current health-care system lacks consumer choice, transparent pricing, and free-market competition. Maybe — just maybe — the solution is to restore these elements, not to eliminate them altogether with a government takeover. What has worked well in the field of prescription drugs can work in other areas of health care as well.

– David Freddoso is an NRO staff reporter.

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