Freeman

ARTICLE

Bipartisan Drug Entitlement

Election-Minded Politicians See Rewards in Demonizing Drug Companies

SEPTEMBER 01, 2000 by DOUG BANDOW

Filed Under : Health Care

Washington 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 nation 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 federal control one bite at a time. Washington is now targeting the pharmaceutical industry.

Congressional Democrats unveiled a $200 billion “drug benefit” as part of Medicare. The “me-too” Republicans, determined to surrender on every important issue, have pushed their own plan.

The fight over pharmaceuticals demonstrates how accustomed Americans have become to the proverbial free lunch. Drugs seem expensive, but the alternatives are more costly. Pharmaceuticals extend our lives, improve our well-being, and replace more dangerous treatments, such as heart bypass surgery.

Indeed, because even expensive prescription drugs are so cost-effective, limiting their use actually increases medical expenses. An attempt by New Hampshire to restrict the number of prescriptions for Medicaid recipients caused an upsurge in doctors’ visits, hospitalizations, and nursing home admissions.

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. Thus, Americans used to getting their medical attention for “free” are horrified at having to actually pay for pharmaceuticals.

However, the very purpose of insurance is to protect against unexpected, catastrophic expenses, not lesser, routine ones. Insurance should cover cancer treatment, not birth control pills.

The demand that health “insurance” pay for everything has grossly inflated its cost. Indeed, the health care “crisis”—spiraling prices and growing numbers of uninsured, as well as rising premiums—reflects the fact that expanded “insurance,” public and private, has turned medicine into a cost-plus system.

More than three-fourths of every medical bill is directly paid by someone else. Since patients cover only a fraction of the cost, they want the most expensive and convenient treatment as soon as possible.

But those responsible for the bills want to pay as little as possible, giving rise to managed care and HMOs, which restrict treatment and ration by inconvenience. The government has also imposed de facto price controls through Medicare and Medicaid, reducing access to and the quality of care.

A federal pharmaceutical program would have the same effects. First, the costs would inevitably rise far faster than forecast. Cut the effective cost of medical care, and people will want more of it. The costs of Medicare, Medicaid, and renal dialysis coverage all began soaring the moment the programs took effect. At Medicare’s inception the House Ways and Means Committee predicted that the program would cost $12 billion in 1990, a staggering $95 billion underestimate. Spending actually exceeded $12 billion in 1975. The initial costs of Medicare’s kidney dialysis program, passed in 1972, were more than twice projected levels. And just eight months after passage of the 1988 Medicare Catastrophic Coverage Act, soon repealed in response to popular protest, the Congressional Budget Office hiked its five-year cost estimates by upward of 100 percent.

Second, as costs rise, the pressure for price controls will grow. Congressional catfights over Medicare and Medicaid reimbursement rates are already routine. States like Vermont are threatening to limit prices because foreign citizens allegedly can purchase pharmaceuticals for less.

Yet price controls would backfire. While government can effectively confiscate existing products, it cannot create new drugs. 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. The process now averages 12 years.

Moreover, the risks are enormous. There are typically 30,000 to 45,000 medical articles on drug therapies a year. Government patents for drugs usually range between 2,000 and 4,200 a year; companies list about half that number as investigational new products with the Food and Drug Administration. Nearly another half fall out by Phase Three of the testing process, and companies end up filing applications for barely 80 to 250. The FDA then approves between 20 and 60. Concludes 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.”

Finally, two-thirds or more of new drugs that reach the market don’t ever recover their full costs. Most ideas never get beyond the research stage.

Not only would price controls cause companies to spend less, but they would also focus their efforts on sure things: minor improvements in existing products rather than dramatic innovations in new fields.

Because American pharmaceutical makers remain relatively free, drugs are one of the nation’s most successful industries: U.S. firms have developed roughly half the pharmaceuticals marketed worldwide since the 1970s. Between 1973 and 1986 American firms accounted for ten times as many drug patents as Germany and Japan, 16 times as many as Great Britain, and 20 times as many as France.

Price controls in other nations don’t even do much to reduce drug costs. Although a variety of studies have claimed that U.S. prices range upward of one-third more to double those in Britain, Canada, and Mexico, Patricia Danzon of the Wharton School warns that these analyses are typically flawed, ignoring the role of generics and volume discounts in America. Danzon concludes that U.S. prices are in the middle. She and a colleague found that “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].”

At the same time, drug price controls have inflated overall health-care costs. A 1999 Boston Consulting Group (BCG) study concluded that the introduction of a “drug budget” in Germany increased specialist referrals, hospitalizations, and treatment costs, wiping out about 60 percent of the expected savings.

Legislators must reject any proposal that would expand government control. Election-minded politicians see rewards in demonizing the drug companies. But the pharmaceutical industry is doing infinitely more than Congress to improve Americans’ health.

ASSOCIATED ISSUE

September 2000

ABOUT

DOUG BANDOW

Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

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