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National Review Online


License to Ill

January 11, 2007

By Dr. Benjamin Zycher

Empowering the feds to negotiate drug prices will be a drag on public health.

Current law excludes the feds from drug-price negotiations, leaving that role instead to the private-sector companies (pharmacy-benefit managers) that manage drug plans on behalf of their enrolled patients. This system is roughly efficient—no small achievement in the Beltway—in that the private companies must balance their customers' demands for both lower prices and access to a broad array of drugs, while the pharmaceutical producers seek prices sufficient to recover their average $1 billion investment in each new drug while preserving the markets for their products.

The federal government, on the other hand, does not have "customers." Instead, it has interest groups engaged in a tug-of-war over shares of the federal budget. Accordingly, if the feds were to take over price negotiations, political incentives to achieve budget savings by driving prices down would be powerful. At the same time incentives to satisfy patient preferences for broader access to drugs would be weakened, as the dissatisfaction of patients would be offset by the support of other constituencies enjoying increases in their favored programs.

These inevitable outcomes of federal price negotiations for drugs are reflected clearly in the legislation soon to be considered by the House. The new law would (1) require the Health and Human Services secretary to negotiate drug prices with pharmaceutical producers and (2) prevent HHS from establishing a particular list of drugs to be covered under Medicare beyond those already required by law.

The feds are extremely powerful when it comes to price negotiations with pharmaceutical companies. Nothing is more obvious than the massive size and bargaining power of the federal government, which is projected to spend about $100 billion—over 40 percent of total U.S. drug spending—on pharmaceuticals in 2007. Even apart from such sheer size, the feds bring to the negotiating table several implicit and explicit offers that can't be refused, and which are private companies cannot offer: threats to exclude given drugs from other government programs, threats to subject approvals of drugs in development to regulatory foot-dragging, threats to impose onerous restrictions on approved uses for given drugs, threats to require costly drug monitoring and other protocols after initial approvals, threats simply to impose specific price discounts as a precondition for inclusion in Medicare. Ad infinitum. The huge size and regulatory power of the federal government—coercive weight obvious even if threats are not made explicitly—yield bargaining power enjoyed by no private business. That negotiating power is the true elephant in the room, and the obvious source of the current political pressures for price negotiations by the federal government.

The feds would further strengthen their bargaining by preventing HHS from establishing a guaranteed list of drugs to be covered under the Medicare Part D drug benefit. The threat to exclude a drug from Medicare coverage puts the federal government in a very strong negotiating position. If there is no initial list of drugs that must be covered under Part D, the threat of exclusion becomes more credible because the feds can simply exclude a given drug from the program at any time. So, by refusing to commit to a given list of drugs that will be covered, the feds preserve their price-negotiating power while sacrificing the goal of broad access to medicines under Medicare.

Federal price negotiations will cause sharp price reductions, but this will yield less research and development investment in new and improved medicines over time. Recent economic analysis published by the Manhattan Institute yields projections that the effect would be a reduction of about ten new drugs per year on average, causing a loss of about five million life-years each year, valued conservatively at $500 billion annually, a sum far in excess of total U.S. spending on pharmaceuticals.

It is no mere cliché that life and liberty are always at risk while Congress is in session, and Congress in haste makes the most waste of all. The proposal for drug-price negotiations is an example of a sweeping government measure that ostensibly aims to improve public health and well-being, but will actually result in the redistribution of huge amounts of wealth from the private sector to various constituencies, without the stigma of a "tax increase." And all that in the first hundred hours.

Original Source:



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