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June 21, 2004

Drug Discount Cards: A Second Opinion

By

Let the savings begin.

On June 1, the federal government launched its new Medicare drug discount card program to help seniors cut their out-of-pocket expenses on prescriptions. Estimates of savings range from 10 percent to 25 percent off retail prices.

There's more. For low-income seniors, the cards carry a $600 subsidy to help offset out-of-pocket costs. This will be a substantial help. So why are critics of the drug-card program doing all they can to minimize it?

For example, FamiliesUSA, a liberal advocacy group, recently published a report that claims drug prices are rising so fast they make the cards basically worthless. "The overwhelming majority of seniors will receive no help this or next year from skyrocketing drug prices," said Ron Pollack, the group's executive director, "For those who get discounts, potential savings will be negated by large increases in base prices."

This would be disturbing, if true. It isn't.

The subsidy will either double or triple the discount rate for low-income seniors, depending on an individual's circumstances. But groups such as FamiliesUSA, and some members of Congress, routinely ignore that fact in their reports and, as a result, do a great disservice to seniors.

Consider the FamiliesUSA study. It excludes drugs that are available in generic form. Generic drugs, of course, are significantly cheaper than brand names.

The study also compares drug-price increases with overall inflation. But that's not quite fair. Since January 2000, drug prices have increased at an annual rate of 4.2 percent, while overall medical costs have increased at an annual rate of 4.5 percent. Both growth rates are higher than inflation in general. But the cost of prescription drugs is clearly in line with -- and is even less than -- the rest of the medical field.

Groups such as FamiliesUSA would prefer that Medicare (i.e., the federal government) hold down costs by "negotiating" prices (code for "price controls") with drug companies. Sure, seniors would see lower prices if they did; when one entity is the gatekeeper of access to millions of customers, you either play by their rules or you don't get to play. But just as communism and socialism look good on paper and fail in practice, the "my way or the highway" approach to drug pricing fails, too.

It costs nearly $900 million and takes several years to develop and bring a new drug to consumers. Drug companies hold patents for only a few years before generic manufacturers can start making and selling them at lower prices. Not only do the companies need to recoup the cost of developing a particular drug, they must make a profit to fund future searches for cures. No wonder drugs cost so much.

Jeff Lemieux, executive director of Centrists.org and former senior economist for the Progressive Policy Institute and a Democrat, has noted the dangers of government intervention. "The potential side effects of government price controls," Lemieux writes, include "lowered research and development and distorted research priorities. Democrats like to pooh-pooh these concerns, but the economics behind them are incontrovertible. Lower expected returns on investment will lead to lower investment, and shifts in the relative prices of drugs will lead to shifts in the types of medicines developed."

The last part of that statement is the most telling -- that price controls "will lead to shifts in the types of medicines developed." Lemieux means that if price controls were ever implemented, you'd better hope you come down with a common disease, one that many people get. Because if you were to come down with something that afflicts only a few thousand people per year and there isn't already a drug for it, there most likely won't be. There simply wouldn't be any company in the world that could afford to spend $900 million on a drug that won't generate any revenues.

The Medicare drug discount card program allows us to create a free market for pharmaceuticals, and this transparency and choice could be the envy of the world. Plus, it helps low-income seniors realize significant savings on their drug purchases.

Some would prefer a different outcome: government price controls on drugs. In order to achieve that goal, they're willing to ignore the facts and discourage seniors from enrolling in a plan that will help them.

Seniors are ill-served by such scare tactics. They deserve a second opinion.

Derek Hunter is a researcher in the Center for Health Policy Studies at The Heritage Foundation.

Distributed nationally on the Knight-Ridder Tribune Wire

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