An idea gaining currency on both sides of the aisle proposes that the U.S. government step in and "negotiate" drug prices for Medicare recipients.
Lawmakers should stop and consider the fate of the pharmaceutical industry in Europe, where this practice is widespread, before they go down this misguided path.
Medicare-eligible senior citizens consume about 45 percent of all prescription drugs sold in this country. With a lock on that much of the market, our government would not "negotiate" with drug companies for discounts, but mandate them – in effect implementing price controls.
European countries have had drug price controls in place for long enough to examine their impact, and it is dismaying.
A recent study by the Department of Commerce looked at the impact of pharmaceutical price controls in 11 members of the Organization for Economic Cooperation and Development, among them the Netherlands, France, and Germany. The study found that price controls caused a $5 billion to $8 billion annual reduction in funding for drug research and development.
What could that amount buy? According to the study, it could lead to the discovery of three or four new molecular entities – potentially life-saving chemicals – each year.
Price controls are a major reason the drug industry's center of gravity has shifted from Europe to America in recent years. Whereas two decades ago, the European and American pharmaceutical markets were about the same size, today the U.S. market is twice as big as the European market and vastly more profitable.
Franz Humer, chairman of Swiss drug maker Roche, noted in a recent speech that "the shift away from Europe is one outcome of years of misguided and short-sighted policies in Europe." No wonder European health experts and politicians, among them the health minister of the Netherlands, are starting to speak out in favor of more competition in the health care system.
It would be a sad irony if U.S. politicians now took us in the opposite direction, by reversing the "non-intervention" clause in the Medicare Modernization Act.
Currently this clause preserves the right of drug makers to negotiate freely with the dozens of companies offering drug coverage to seniors.
Reversing it would remove many of the benefits of the Medicare act's innovative Part D. By using the free market to stimulate competition among drug makers, Part D has resulted in lower premiums than anyone expected – an average of just $32 dollars a month, and, in every state but Alaska, at least one plan that costs only $20 a month.
Under Part D, moreover, patients are not confined to a restrictive formulary of available drugs, but can pick the plan that offers the drugs they need.
This has important health implications. Under single-buyer systems like the Veterans Administration program, the buyer controls costs by limiting the drugs available. So, for example, only 19 percent of drugs approved by the FDA since 2000, and only 38 percent of drugs approved in the 1990s, are listed on the VA formulary.
Part D's competitive prices and high degree of personal choice are being achieved by allowing customers to shop around among different private plans offering the drug benefit. The plans, in turn, negotiate with drug makers for the best deals. Since they must win customers, we can be sure that they're working to get the lowest prices and the best selection.
If we repeal non-intervention and simply have the government mandate Medicare discounts, we would eventually curtail the number of existing drugs available to seniors, who would have to rely on a single-buyer formulary.
And we would begin to dry up the supply of new drugs, as has already happened in Europe. From 1998 to 2002, there were only 44 new drug launches in Europe — compared to 85 in the United States.
Furthermore, if we implemented European-style price controls, we wouldn't likely do better than the prices the private plans are already getting.
Instead of Part D's $20-a-month premiums, we would have something more like Medicare Part B, which covers doctor's visits under a traditional, no-competition system. Its premiums will increase by 13 percent next year.
So repealing Part D's non-intervention clause wouldn't solve the problems it's supposed to solve. It would, however, cripple the American drug industry, currently a factory of life-saving cancer and AIDS medications.
When price controls make it impossible for companies to recoup investments, they get out of the business.
Or they move. Roche CEO Franz Humer pointed out that just as the locus of drug making has shifted from Europe to America, it could migrate to Asia, where technology and education are steadily improving. His own company just opened a research center in Shanghai. That should be a warning to American politicians who would strangle our domestic drug industry with price controls.
Grace-Marie Turner is the president of the Galen Institute, a health-research organization based in Alexandria, Va.