July 18, 2002

July 18, 2002 | WebMemo on Health Care

Why Patchwork Senate Drug Bills are No Substitute for MedicareReform

The Senate will soon debate legislation to give Medicare beneficiaries a prescription drug benefit. The Senate is also considering other legislative proposals aimed at reducing the price of prescription drugs. The proposals are badly designed and misdirected. If enacted, these proposals will ultimately restrict seniors' access to new, more effective drugs and treatments.

Most seniors have prescription drug coverage through supplemental health plans, including retirement plans offered by former employers. Under leading House and Senate Medicare prescription drug proposals, it is likely that these private plans will be displaced. A better idea is to target resources to the minority of seniors who do not now have access prescription drug coverage, and to do so in a way that is compatible with comprehensive Medicare reform. In 1999, the majority of the National Bipartisan Commission on the Future of Medicare outlined a proposal for comprehensive reform, including the incorporation of prescription drug coverage, based on the successful experience of the Federal Employees Health Benefits Program (FEHBP). The Bush Administration also endorsed this approach.

Badly designed Medicare drug proposals, combined with other legislative proposals that would inhibit the generation of new medicines, are not the answer. Congress should refrain from making matters worse, and instead take steps that will give Medicare patients access to the best health care in the world.

Why Senate Drug Policies Will Backfire

Either unable or unwilling to tackle comprehensive Medicare reform, congressional leaders instead are promising seniors what they cannot deliver: high-quality drug coverage through a government program. They are proposing to do this through the re-importation of drugs made in America that have been subjected to Canadian price regulation and by promoting cheaper, generic drugs.

S. 2244, Prescription Drug Price Parity for Americans Act, sponsored by Senator Byron Dorgan (D-ND).

This bill would promote the re-importation of drugs from Canada for resale in the United States. The aim of this legislation is to reduce the price of drugs in the United States. While this legislation is superficially reasonable and politically attractive for Members of Congress, its effects would surely be counterproductive.

First, prescription drugs can be cheaper in Canada because of government pricing. Canada and other foreign governments routinely demand that American pharmaceutical manufacturers offer their drugs at, or even below, their market value. Foreign government pricing thus shifts a disproportionate share of drug research and development costs onto American consumers. But drug manufacturers are not required to sell their medicines to Canada or other foreign countries, so the re-importation option creates a different problem. If prescription drugs brought in from Canada flood the American market, the legislation could encourage pharmaceutical manufacturers to limit the supply of those products to Canada. This would either leave Canadians with no adequate surplus for re-importation or simply stop the sale of those products altogether. The drugs would then be less available or available only at a substantially higher price.

Second, the proposal would make investments in new medicine less attractive. If the legislation actually did prove successful in reducing the price of drugs within the boundaries of the United States, pharmaceutical revenues and profit margins would obviously decline. Congressional rhetoric notwithstanding, this is not a good thing. While pharmaceutical manufacturers are often forced to accept smaller profit margins in those countries that do not pay fair market value, they must depend on those countries, including the United States, that do not fix their prices. The potential loss of revenue and smaller profit margins would lead to less reinvestment in the intensive research and development that creates new and improved drug treatments. Therefore, current drug supplies would tighten, and future breakthrough medicines and treatments might either slow or, in some cases, never even materialize.

Finally, significant safety concerns surrounding the lack of assurance Americans would have in the quality of the re-imported drugs still remain. At a recent Senate Special Committee on Aging hearing, Food and Drug Administration (FDA) Senior Associate Commissioner William Hubbard presented the potential dangers associated with importation by individuals, the purchase of drugs from foreign sources over the Internet, and the potential introduction of counterfeit drugs into the United States. In a recent speech, Health and Human Services (HHS) Secretary Tommy Thompson said:

Opening our borders to re-imported drugs potentially could increase the flow of counterfeit drugs, cheap foreign copies of FDA-approved drugs, expired and contaminated drugs, and drugs stored under inappropriate and unsafe conditions. In light of the anthrax attacks last fall that's a risk we simply cannot take.

This is not a partisan issue. Secretary Thompson's comments reflect similar concerns over re-importation expressed by former HHS Secretary Donna Shalala when the Clinton Administration faced similar congressional proposals. These unresolved safety issues add to the troubling features of this proposal.

S. 812, Greater Access to Affordable Pharmaceuticals Act, sponsored by Senator Chuck Schumer (D-NY) and Senator John McCain (R-AZ).
This bill would reformulate the existing Hatch-Waxman Act, which addresses the intellectual property rights of pharmaceuticals and availability of generic drugs on the market. The proposed changes would aim to bring cheaper generic drugs to the market sooner. But, like congressional attempts to manipulate the drug markets, this legislation could result in the development of fewer drug treatments in the future.

While generic drugs play a valuable role in the pharmaceutical market by offering cheaper versions of brand-name drugs, the scientists and researchers who work for pharmaceutical companies invest a considerable amount of time and effort in bringing a new discovery to market. New drugs usually cost $800 million and take 14 years to move from the laboratory to the market. Under current law, the companies enjoy a period during which they hold exclusive patents on their discoveries, a recognition of the intellectual property rights extended to all industries. It is during their period of patent market exclusivity that many pharmaceutical companies are able to recoup part of the investment, both financial and otherwise, that went into creating their medicines. Without this patent period, these companies would not have the same incentive to continue their research and development of new medicines.

Ordinary Americans often do not realize how time-consuming the drug approval process is. Pharmaceutical companies must submit each discovery to the FDA for approval during its patent period. The cumbersome approval process can take years off a patent's life. As Dr. Merrill Matthews, Visiting Scholar at the Institute for Policy Innovation, points out,

That research and approval process can take the first eight to twelve years of the 20-year patent life, leaving maybe 10 years or less of useful patent life in which the drug company that procured the patent and invested the research money has exclusive right to sell the drug-assuming the drug ever makes it to market."

Therefore, while Members of Congress debate adjusting the patent life of pharmaceuticals, they should take into consideration the consequences of their actions for future research and development. Unraveling the 1984 Drug Price Competition and Patent Term Restoration (Hatch-Waxman) Act would undermine the fair and balanced approach designed by its authors. Senator Orrin Hatch (R-UT), co-author of the 1984 legislation, stated in his testimony before the Senate Health, Education, Labor, and Pensions Committee just a few months ago:

This statute reflects a carefully crafted balance that promotes the development of tomorrow's innovative therapies and allows today's off-patent drug products to be sold by generic manufacturers at the most competitive prices to patients very concerned about the ever rising cost of health care.

While Senator Hatch does not exclude the need for improvement, he concludes:

But based on what we know today, I think that S. 812 goes too far without a compelling demonstration of systematic abuse, and it upsets the carefully crafted balance dynamic with the Bolar provision. [The Bolar provision refers to an amendment included in the 1984 legislation that allows generic drug firms to get an early start in the FDA approval process before the original patent has expired.]

Conclusion

Medicare, the government health care program for seniors, should provide Medicare patients access to high quality health care. But Medicare has fallen behind in offering its beneficiaries the latest in medical treatments and therapies, including prescription drug coverage. Members of Congress should undertake structural improvements in Medicare that will ensure seniors have access to medical innovation and technology within a market-based framework that ensures competition, choice, and quality, whether it be a new life-saving cancer drug or an improved pacemaker.

Instead, too many Members of Congress seem intent on trying to hold on to an outdated structure of central planning and price regulation while substituting patchwork drug proposals for real reform. These patchwork proposals will not work. In one way or another, their provisions will discourage, rather than encourage, the development of new prescription drugs and could actually reduce seniors' access to life-improving, life-saving therapies.

If members of the House and Senate want to help today's seniors and prepare for the wave of baby boomers set to retire within the next nine years, they should do so by getting serious about improving the way in which Medicare works, addressing Medicare's increasingly serious managerial deficiencies, and adding a new prescription drug benefit only within the context of real Medicare reform.

Nina Owcharenkois a Health Care Policy Analyst in Domestic Policy at The Heritage Foundation.

About the Author

Nina Owcharenko Director, Center for Health Policy Studies and Preston A. Wells, Jr. Fellow
Center for Health Policy Studies

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