The Magazine

I Want a New Drug

Why price controls will stop pharmaceutical progress.

Jun 16, 2003, Vol. 8, No. 39 • By WILLIAM TUCKER
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FACED WITH RISING Medicaid costs, the states have begun to trumpet the oldest illusion about government power--that price controls can make things abundant and "affordable," in this case prescription drugs.

On May 19 the U.S. Supreme Court gave the green light to a Maine program that includes thousands of uninsured citizens in a discount drug-buying program the state has forged for Medicaid patients. The decision rang the gong for other states to start similar efforts. Within a week, Ohio Republicans announced they would no longer oppose a similar discount program for the uninsured. New York, Minnesota, Texas, Michigan, and twenty-one other states have similar schemes afoot. There is even talk about forming regional cooperatives to impose what amounts to price controls on the entire drug industry.

These programs go far beyond normal bargaining. In Maine, for example, if drug companies refuse to negotiate with state officials over discounts for the uninsured, their products will be subjected to extra scrutiny for Medicaid reimbursement. The new law also gives state officials authority to set prices unilaterally--as they already do with Medicaid purchases. A private company that behaved like this would be prosecuted for antitrust.

As with any price controls, present consumption will be favored over future development. This will be a slow-motion disaster for American medicine. Pharmaceutical companies now invest 18 percent of their revenues in research and development, the highest of any economic sector. Nine of the top twenty research spenders are pharmaceutical companies. Americans as a result have enjoyed, and come to take for granted, a spectacular outpouring of new medicines for AIDS, cancer, Alzheimer's, congestive heart failure, cystic fibrosis, depression, and a host of other diseases. With fewer revenues to invest, that pipeline will eventually slow to a trickle.

Drug-price-control initiatives are based on the faulty perception that prescription drugs are the cause of medical inflation. "During the past two years, spending on health care has increased by more than $200 billion, a jump of nearly 17 percent, primarily because of the rising cost of prescription drugs," writes national financial columnist Lou Dobbs. This is nonsense. Prescription drugs were only 9 percent of health care costs (hospitals absorb 32 percent, doctors 22 percent) in 2000. Drug prices would have had to double each year to account for this $200 billion increase.

In fact, new drugs commonly substitute for more expensive treatments such as surgery and hospitalization. Treating stroke patients with new clot-busting drugs has saved $4,400 per patient by cutting hospitalization and rehabilitation costs, according to a study sponsored by the National Institutes of Health. Humana Hospitals found that while new drugs for congestive heart failure increased pharmacy costs 60 percent, they cut hospital costs 78 percent, saving $9,000 per patient. Not incidentally, the same drugs also cut mortality rates from 25 percent to 10 percent.

Prescription drugs are expensive--there is no doubt about that. Some ordinary antibiotics or antihistamines now run close to $100 per prescription. Almost everyone with private insurance has drug coverage, although some copayment is usually required. Medicaid provides access to the poor. As usual, the uninsured--generally people employed in small businesses--are a problem.

Certain to bring the crisis to a boil are proposals from Congress and the Bush administration to cover prescription drugs through Medicare. The drug industry--perhaps a bit foolishly--is supporting the initiative, figuring it will pay the bills. A more likely scenario is that Medicare itself--following the example of the states--will become a new instrument for imposing price controls. A better approach would be to look at what makes prescription drugs so expensive in the first place, and whether these development costs can be reduced.

An obvious target would be the Food and Drug Administration (FDA) approval process, which is rapidly becoming obsolete. Founded during the Progressive Era, the FDA kept close watch over the toxic dangers of new drugs until the thalidomide birth defects of the early 1960s--an episode that mainly affected Europe and was successfully prevented by the FDA in this country. Nonetheless, Congress took the occasion to expand the FDA's responsibilities to include testing for efficacy as well as toxicity.