During the 2001 anthrax attacks, thousands of Americans who were possibly exposed to the deadly bacteria were given a powerful antibiotic, Cipro.
The drug, developed by Bayer HealthCare, was literally a lifesaver during the crisis — especially for vulnerable postal workers and Capitol Hill staffers. Many who weren't even at risk also obtained prescriptions simply for piece of mind. In New York City, for instance, demand became so great that many pharmacies could fill only 10-day orders of the drug.
At the height of the crisis, fearing that there wouldn't be enough Cipro in the event of a national outbreak, the U.S. government decided to purchase more than 100 million doses of the drug. By the end of the ordeal, Cipro was a household name and widely credited with helping avoid an even greater public health catastrophe.
What's usually not remembered, however, is how the federal government acquired the critical drug.
When the government decided to stockpile Cipro, Health and Human Services Secretary Tommy Thompson balked at Bayer's deeply discounted price and demanded that the company sell Cipro far below its market value. Thompson threatened to yank Bayer's patent on the product unless the company complied.
Bayer eventually succumbed to the government's demands and sold the drug for about 95-cents a pill. Previously, Cipro had retailed for just over $4.50 a pill.
Both Bayer and the government claimed that the discount was necessary to fight the war on terror. Nonetheless, the Cipro negotiation had a host of unintended consequences that our leaders are only beginning to confront today.
For example, the House of Representatives earlier this year passed a measure allowing the government to "negotiate" prices for prescriptions covered under the Medicare drug benefit. The Senate also plans to take up the measure. Supporters claim that "negotiations" will lead to lower prescription drug prices.
Shockingly, they often cite the Cipro negotiation as proof that the government can use its size and purchasing power to cut costs. This analogy is deeply flawed, and it?s critical for policymakers to understand why.
First and foremost, the Cipro example proves that the government doesn't negotiate prices. It sets them. It held Bayer over a barrel and threatened to yank its patent rights if it didn't meet the government's price.
It's one thing for the government to demand a lower price to stockpile drugs at the height of a public health or national security emergency — as with the anthrax scare. The government must be able to respond quickly and have the resources on hand to protect citizens from attack.
It's quite another thing, however, to dictate prices for a wide variety of drugs that seniors take on a routine basis month after month. It would undermine the entire process of discovering new cures if the government — which purchases close to two-thirds of all drugs consumed in this country — could arbitrarily determine how much pharmaceutical companies are paid.
For instance, if Bayer knew up front that it would have difficulty recouping its investment in Cipro, it might not have produced the drug in the first place.
What company would spend billions of dollars researching and developing a new drug when the government could dictate a below-market price at any moment or, worse yet, pull its patent and allow others to produce the pill? Who would front the funds for such a risky investment?
Even the very threat of price controls can frighten away investors, dampening research into new cures.
In 1993, for example, the Clinton administration proposed a plan to set prices on so-called breakthrough drugs. Not surprisingly, the next two years saw substantial declines in the growth of drug research and development. It wasn't until 1996, after the Clinton plan's defeat, that R&D expenses began to return to previous levels.
When the government meddles in drug pricing, investors take their money elsewhere. As a consequence, fewer new drugs are developed. Those who desperately await the invention of the next miracle cure are the ones who suffer the most.
Contrary to the claims of price-control advocates, Medicare's prescription drug benefit has been a tremendous success thus far, helping millions of seniors access a broad array of drugs at affordable prices. This success is a result of the fierce competition among private plans for seniors' business.
If Congress gives the government the power to "negotiate" prices, the benefits of competition will be lost. Promising drugs in the research and development stages will be shelved. Seniors will be left with fewer options and, ultimately, worse health care.
As Senators debate these provisions, they should remember what they saw at their own offices during the anthrax attacks. Thousands of staff members and many lawmakers received Cipro after several Hill offices came into contact with anthrax. Just imagine what would have happened if Cipro had not been invented at all.
Grace-Marie Turner is president of the Galen Institute, a non-profit research organization focusing on free-market solutions to health reform. She can be reached at P.O. Box 19080, Alexandria, VA, or at firstname.lastname@example.org.