The Magazine

Nickel-and-Dimed to Death

Price controls for prescription drugs are a prescription for disaster

May 22, 2000, Vol. 5, No. 34 • By ROBERT M. GOLDBERG
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Even when new drugs are made available under government ration schemes, people have to wait for them to be doled out by bureaucrats or the private firms who are paid to make the decision for the government. On average it takes three years for most European countries to set a price and begin paying for a product once it is available in America. In Canada, it can take up to two years after a drug has been approved in the United States. The determination for the use of a drug is made by a review panel or a utilization review company, which may allow the use of a new drug for only a limited period of time. Studies by health care researcher Susan Horn have found that such restrictions can actually drive up the use of more expensive hospital and emergency room care -- because patients are sicker.

Finally of course, if you stop paying for new drugs, you discourage investment in innovation. No surprise then that Canadian drug firms produce few new medicines worth marketing worldwide. Price controls mean that Canadians, like other beneficiaries of government health care around the world, actually sponge off of American research. It is equally unsurprising that the operational headquarters of the new Glaxo-Smithkline company -- two formerly British drug powerhouses -- will be in New Jersey, arguably now the world's capital for drug development.

Ultimately, it is not just the price of prescription drugs that is at issue. It is their effectiveness in keeping people well, reducing death rates, and extending and enriching life for millions of people. Drug costs have been rising at 12 percent a year (while inflation in the cost of other services is only 5 percent) for a good reason: Prescriptions are making it possible to reduce the rate at which we use hospitals and other less effective and often more expensive medical interventions. Frank Lichtenberg, a professor at Columbia University Business School, estimates that a one-time pharmaceutical research and development investment of $ 15 billion saves 1.6 million life-years annually (which is worth about $ 27 billion in economic productivity) and reduces spending on doctors and hospitals.

Such new technologies undermine the great moral claim of all government health care systems: that universal coverage, economic redistribution, and heavy government subsidies to insure access are the key to better health. To the contrary: Medical progress and the welfare state are natural antagonists.

The Clinton Medicare prescription drug benefit proposal would give the government control of about 60 percent of the pharmaceutical market. As the largest purchaser of care for the most frequent consumers of pharmaceuticals (the elderly), Medicare would treat drugs as simply another entitlement, the sum total of which is more important than the quality or medical value of any of its parts. The idea that a Medicare drug benefit would always offer, in the words of one Medicare official, "drugs that were found to be reasonable and necessary by [a patient's] own physician" is laughable.

Government-run drug plans such as Medicare, Medicaid, and the Veterans' Affairs system already limit new drugs to contain costs. These programs deny and restrict access to new drugs for treating cancer, schizophrenia, high cholesterol, and ulcers that have been proven more effective and provide a better quality of life. The Clinton drug plan will apply the same template as all drug price-control plans, inevitably resorting to outright restriction of medical innovations through mandatory generic drug switching, restricted formularies, prior authorization from drug benefit managers for new drug use, and limits on prescription refills. There is no other way to handle medical progress, once you have defined its introduction as a threat to the system.

Indeed, proponents of the Clinton drug plan make no bones about denying people access to the mighty river of medical innovation to achieve their goal of a Medicare prescription drug benefit. Robert Reischauer, president of the Urban Institute, has said, "If you could tell me that we would provide coverage to 34 million [uninsured people], but the price of that [would be that] we would in 1999 have to live with 1997 medicine, I would say, fine, as long as the 1997 medicine continued each year."