Bipartisan Drug Entitlement

July 14, 2000 • Commentary

The federal government came close to wrecking the U.S. health care system in 1994. Only resolute resistance to the Clinton administration’s proposal to take over American medicine prevented this country from proceeding down the disastrous path of nationalized care prevalent around the world.

Although defeated in his attempt to gulp down the health care system, President Clinton has succeeded in expanding government control one bite at a time. He is now targeting the pharmaceutical industry.

Alas, he faces virtually no opposition. Congressional Democrats have unveiled an even more expensive, $200 billion “drug benefit” as part of Medicare’s coverage of the elderly. The “me‐​too” Republicans, determined to surrender on every important issue, are pushing their own plan.

Drugs seem expensive, but the alternatives are more costly. Pharmaceuticals extend our lives, improve our well‐​being, and replace more dangerous and pricey treatments, such as heart bypass surgery.

The reason drugs seem so expensive is that private insurance and government programs, particularly Medicare, cover a lower percentage of their cost than of other care. However, the very purpose of “insurance” is to protect against unexpected, catastrophic expenses, not lesser, routine ones — cancer treatment rather than birth control pills.

Unfortunately, expanded “insurance,” public and private, has turned medicine into a cost‐​plus system. A government pharmaceutical program would worsen the problem.

First, the costs would inevitably rise far faster than forecast. For instance, at Medicare’s inception the U.S. House Ways and Means Committee predicted that the program would cost $12 billion in 1990, a staggering $95 billion underestimate.

Second, as costs rise, the pressure for price controls would grow. Congressional catfights over Medicare and Medicaid (which covers the poor) reimbursement rates are already routine. The states of Maine and Vermont are threatening to limit prices because foreign citizens allegedly can purchase pharmaceuticals for less.

Yet price controls would backfire. Limiting what pharmaceutical makers can charge would cause them to reduce research and development.

Since 1962 both the total cost of bringing drugs to market, and the length of time devoted to testing and review, effectively cutting a product’s patent protection, have more than doubled. This process now averages 12 years.

Moreover, there are far more dry holes than gushers. Explains Michael Ward, staff economist at the Federal Trade Commission, “In all, firms will market about one out of a hundred of the products for which they have developed patents.” And two‐​thirds or more of new drugs that reach the market don’t recover their full costs.

Because American pharmaceutical makers remain relatively free, drugs are one of the nation’s most successful exports: U.S. firms have developed roughly half of the drugs marketed worldwide since the 1970s.

Price controls in other nations don’t even do much to reduce costs. Although a variety of studies claim that U.S. prices range upwards of one‐​third to double those in Britain, Canada, and Mexico, Patricia Danzon of the Wharton School found these analyses to be flawed, typically ignoring the role of generics and volume discounts in America.

Danzon concluded that U.S. prices are in the middle: “the average U.S. consumer would have paid 3 percent more in Canada, 27 percent more in Germany, 30 percent less in France, 9 percent less in Italy, 8 percent less in Japan, 44 percent more in Switzerland, 9 percent more in Sweden, and 24 percent less in the [United Kingdom].”

Of course, some elderly and poor are still hurting from high drug prices, though two‐​thirds of seniors are covered through Medicaid or private policies. One response would be to make Medicare more flexible, providing a voucher to recipients to purchase the private plan, which could include pharmaceutical benefits, that best met their needs. Or government could assist poor seniors in paying catastrophic drug expenses.

In any case, legislators should reject any proposal that would expand government regulation over industry prices and practices. Pharmaceuticals are lifesavers.

The Pharmaceutical Research and Manufacturers of America reports that 369 “biotechnology medicines” alone are being developed to combat AIDS, blood disorders, cancer, diabetes, genetic conditions, heart disease, infections, infertility, neurologic disorders, and more.

Election‐​minded politicians see electoral rewards in demonizing the drug companies. But the pharmaceutical industry is doing infinitely more than Congress to improve people’s health.

U.S. drug makers are successful because they are free. Washington should leave them alone.

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