Economy & Budget

Price Controls Can Be A Killer

Every newspaper is abuzz with stories of bewilderment as 40 million elderly Americans begin signing up for one of the largest government entitlement programs in history. There has been plenty to complain about regarding the new Medicare prescription drug benefit: It’s expensive, it’s confusing, and nobody knows what results it will bring.

But if you think the drug benefit is a headache now, you ain’t seen nothing yet. If certain politicians get their way, the program could end up far worse than its fiercest opponents ever predicted.

Senators from both parties have introduced legislation to repeal the Medicare Act’s “noninterference clause.” This provision holds that the government may not interfere with price negotiations between private drug plans and manufacturers. The feds can’t set prices, nor can they institute a formulary that determines which medicines can be purchased.

Striking the noninterference clause would cause irreparable damage to our nation’s health care system — damage that would affect everyone, not just our nation’s seniors. It would vastly increase government intrusion into the prescription drug market, and seniors would likely lose access to the life-saving medicines they need.

For starters, governments have neither the right information nor the right incentives to set prices that will effectively make the trade-off between prices and profits necessary to motivate investment in future research and development. Medicare-eligible seniors are the largest part of the American drug market, consuming almost half of all drugs sold here. So in mandating prices, the government would effectively be instituting nationwide price controls.

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 $800 million per drug.

The market price for drugs reflects these risky investments. Government-mandated prices do not. The difference is literally 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.

Looking to the future, the researchers predict that should noninterference be repealed, R&D spending will drop by almost 40% — producing a loss of 277 million life years. We’d never know if this lost research could have generated a cure for cancer or AIDS.

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 non-partisan 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.”

Price controls could actually increase costs for taxpayers. CBO 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. 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. The top-selling Lipitor, a statin that lowers heart attack and stroke risk, isn’t even on the list.

This life-threatening lack of choice is what 40 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.

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