May 26, 2004

May 26, 2004 | News Releases on Health Care

Government Price Fixing Could Harm Patients, Analyst Says

WASHINGTON, MAY 26, 2004-Cost projections for the new Medicare drug entitlement are soaring, causing some lawmakers to press the government to use its "enormous market clout" to set drug prices. But that's a bad idea, according to a new paper from The Heritage Foundation.

"If the government decides-based mainly on price-which drugs to buy for 41 million Medicare enrollees, it may very well limit what it spends on drugs. But it will do so at the expense of treating some patients' illnesses," writes Edward Haislmaier, a visiting fellow in Heritage's Center for Health Policy Studies.

There are numerous problems with the Medicare law Congress passed last fall. But, Haislmaier writes, one good feature is its reliance on tested private sector systems for drug pricing and delivery.

Lawmakers realized how difficult it is for any single benefit plan to strike the correct balance between drug prices and drug availability for most seniors. That's why, he says, they specifically left that job in the hands of those with the most experience-private insurers and pharmacy benefit managers (PBMs).

After all, drugs are not a commodity, and the drugs available to treat a given condition aren't necessarily interchangeable, Haislmaier notes. Some drugs work better for some patients than others. And some drugs are available in generic forms, while others are patent-protected.

Private PBMs have decades' worth of experience buying prescription drugs at affordable prices, and each of the three largest PBMs today has more members than Medicare. In contrast, "Medicare's managers have no previous experience buying outpatient prescription drugs and are notorious for inefficient bureaucracy," Haislmaier writes.

In fact, the only methods the government could use to hold down prices are harmful ones, the analyst writes. The government could:

  • Force patients to substitute expensive drugs for cheaper ones. This would leave patients with no alternatives-or at least none for which the government will help pay the costs.
  • Restrict a drug maker's market access. If a manufacturer refuses to charge prices that are acceptable to the government, the government simply can deny seniors access to those drugs. This could take critical drugs off the market.
  • Control intellectual property by removing patents. Doing so would undermine future innovation, as well as international patent laws, and restrict the flow of new products to consumers.
  • Extract price concessions through regulation or legislation. But such moves would undermine market confidence in the fairness and predictability of corporate tax laws among other companies and industries. It also could spark trade conflicts between the U.S. and other countries if drug makers responded by refusing to sell their products in those countries.


"Overall, there is much to criticize about the design of the new Medicare drug entitlement," Haislmaier writes, but Congress should not make its flawed design problems worse.

He urges Congress to allow the market to work, rather than impose drug purchasing or pricing policies in a way that would diminish the quality of health care received by America's seniors.

Haislmaier's paper can be found online at heritage.org/Research/HealthCare/ bg1764.cfm.

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