The Magazine

Politics vs. Medical Progress

The Bush administration flirts with price controls.

Jun 25, 2001, Vol. 6, No. 39 • By ROBERT M. GOLDBERG
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NOW THAT THE DEMOCRATS CONTROL THE SENATE, price controls are back on the legislative agenda. Western electricity producers are first in line, and pharmaceutical firms are sure to be next. Democrats will likely use the issue of adding a drug benefit to Medicare (the federal health insurance program for all seniors) to beat the drum once again for federal regulation of drug prices. But it’s the Bush administration’s Department of Health and Human Services that is floating the two most potent price-control proposals.

The first of these is a time bomb that was set ticking late in the Clinton administration. Two states, Vermont and Maine, were granted waivers to allow people ineligible for Medicaid (federal health insurance for the poor, which covers prescription drugs) to purchase drugs at a price set by the federal government (effectively 15 percent below the price paid by wholesalers). Biotech and pharmaceutical companies must sell at this discount or see their products banned from all federally funded health programs, nearly 20 percent of the market. Vermont was given its waiver in November 2000 to help Al Gore make a campaign statement. Maine got the go-ahead hours before Clinton left office.

State legislators regard such mandated rebates as a cost-free way of offering constituents a drug benefit—cost-free, that is, to the public treasury. As the drug companies see it, the subsidy comes out of their pocket. Over 30 state legislatures, including those of Florida, Wisconsin, and California, are planning to follow Vermont and Maine in establishing similar discount drug programs.

But such rebate programs do little to help those in greatest need. For instance, the Vermont program covers individuals with incomes at or below 300 percent of the federal poverty level; individuals, that is, with incomes up to $26,800. As a group, seniors at that income level without drug coverage spend 3 percent or less of their income on prescription drugs, and non-seniors spend only half as much. But those among them for whom prescription drugs are the heaviest burden would get little relief: A senior at the federal poverty level ($7,800), for example, who spends 30 percent of his or her income on drugs ($2,340) would receive discounts amounting to only about $351.

In addition, Medicaid waivers would undermine the administration’s effort to reform Medicare by having private insurance plans provide prescription drug coverage as part of an integrated package of health benefits. Since new drugs can often obviate the need for other medical care, there is an advantage to having these benefits delivered by a single health plan. But if Health and Human Services secretary Tommy Thompson grants state waivers, private plans will be less likely to offer drug coverage. Indeed, they will have an incentive to drop any coverage of prescription drugs they currently offer. Why should insurers pay for something the taxpayers and the biotech and drug firms are already providing?

Meanwhile, there’s a second price-control time bomb that’s about to explode. Last year, the inspector general of HHS recommended that Medicare and Medicaid pay no more than the Federal Supply Schedule price for all medications. That is the price currently paid only by the Department of Veterans Affairs and some public health hospitals, which together account for less than 1 percent of the total prescription drug market. If the inspector general’s proposal became policy, nearly 70 percent of all the drugs prescribed in America would be under price controls. In some cases, breakthrough drugs would be reimbursed or priced at less than 10 percent of their current market price. Drug companies argue that this would discourage use of the best new drugs and undermine development in the future.

Decisions about such price controls on drugs ultimately rest with Secretary Thompson and the newly appointed head of the Health Care Financing Administration (HCFA), Tom Scully. Thompson has stated his opposition to outright price controls, such as those of the Federal Supply Schedule, and has quietly put a proposal to import lower priced drugs from overseas (a backdoor form of price controls) into cold storage.

But Thompson has publicly endorsed other measures similar to price controls. Last week he told the Washington Post that the National Institutes of Health should recoup a portion of the proceeds from pharmaceuticals it helps develop, and the money could be used for a prescription drug purchasing program.

Past efforts to "recoup" NIH research dollars other than through royalties inspired price caps imposed on companies partnering with government scientists. Such limits on future return on investment drove biotech capital and researchers away from NIH projects. As a result, potentially useful science was left without support, and the public’s investment in biomedical research was wasted when NIH failed to find partners to produce new drugs. When the recoupment requirement, imposed in 1989, was eliminated in 1994, cooperative research flourished again.

Further, Thompson expressed support for senator Bob Graham’s Medicare drug benefit as part of an overall Medicare reform. The problem is, Graham’s plan, like one proposed in 1999 by President Clinton, relies on government price controls and drug lists. To get a taste of what medicine would be like under the Clinton drug benefit, take a look at the Veterans’ Affairs drug lists. Under the VA regime, if you have pancreatic cancer or schizophrenia or depression, you have to fail on several cheaper drugs before you get access to the more expensive, more effective medications.

Such price-control measures not only would derail Medicare reform but also would threaten medical progress. The administration needs to take the long view of health care reform. Price controls will stop the transformation of medical care. They will promote the expensive and medically futile, labor-intensive delivery of services at the end stage of disease and at the end of life, rather than encouraging the innovative, capital-intensive use of breakthrough medical technologies to detect the first signs of disease and intervene early, which is always more cost-effective and boosts independence and human productivity. Price controls, whatever the mechanism by which they are imposed, militate against medical progress. What is the administration thinking?

Robert M. Goldberg is a senior policy fellow at the National Center for Policy Analysis.