QUESTIONS AND ANSWERS ON NRLC'S OPPOSITION TO DRUG PRICE CONTROLS

 

Why is a pro-life organization concerned about price controls for drugs?

Since its inception, the National Right to Life Committee (NRLC) has been committed to protecting the right to life from conception until natural death, which means that we have fought just as strongly against infanticide and euthanasia as we have against abortion. In particular, we have strongly opposed involuntary denial of lifesaving medical treatment through rationing.

In 1994 we opposed the Clinton Health Care Plan's proposed insurance premium price controls because they would have forced rationing. In 1995-2003, during the congressional debate over Medicare restructuring, we successfully fought for the ability of older Americans to add their own money, if they choose, to government payments for health insurance premiums in order to obtain insurance plans that are less likely to ration care.

Now, NRLC is opposing legislative changes in Medicare that would effectively impose rationing of lifesaving drugs through drug price controls.

 

How do drug price controls cause rationing?

Drug price controls have a devastating effect on the development of new lifesaving drugs.

Research and development is financed by investors who buy stock or provide venture capital. Investment in pharmaceutical development is risky. Many promising leads fail to work out and never make it to the market. On average, of 5,000 potential new drugs tested, only one is eventually approved for patient use. Of all new drugs brought to market, only 30% recover their research and development costs.

A 2003 study by the Tufts University Center for the Study of Drug Development determined that the average pre-tax cost of new drug development is $802 million. The prospect of a high return if they do invest wisely and luckily is the only thing that induces investors to face such a risk.

If there is a $100 lottery with a ticket price of $1 and 100 to 1 odds against winning, you may buy the ticket despite the odds because of the possibility of the high payoff. However, if the prize in a 100 to 1 odds lottery with a ticket price of $1 is only $2 or $3, you are very unwise if you buy a ticket! Few would do so.

Those who say drugs are overpriced often compare the high price of an innovative, breakthrough drug with the low cost of its production, and conclude that, even taking into account the cost of research and development for that particular drug, the patient is being gouged to produce windfall profits. This perspective fails to recognize that it is only the possibility of that high rate of return that can induce investors to invest despite the high odds against any given potential drug ever getting to the market and then, actually making any money.

However, many patient groups working for the cure or amelioration of devastating diseases do recognize the grave impact government drug price controls would have on desperately needed research, and oppose them in Medicare, including the Kidney Cancer Association, the Montel Williams Multiple Sclerosis Foundation, the Amyotrophic Lateral Sclerosis ["Lou Gehrig's disease"] Association, and the National Alliance for the Mentally Ill.

 

What does all the money spent on drugs get us?

A detailed study by Frank Lichtenberg, associated with the National Bureau of Economic Research, found that when one compares increases in longevity for those with diseases for the 21 years from 1970 through 1991 during which the mean age at death increased 5.4 years, the 19 diseases with the highest use of new drugs saw a reduction of life-years lost of 72.7% - - over 5 times the 13% reduction for the 19 diseases with the lowest use of new drugs. The average new drug introduced in that period saved 18,800 life - - years in 1991 - - and is assumed to be doing so each year since.

Just a few of the many recent "innovator" drugs that are bringing dramatic advances in saving lives are:

Gleevec ¦ a drug that zeros in on cancer cells, leaving normal ones alone, allowing much more effective treatment with fewer side effects for those with chronic myeloid leukemia

Iressa ¦ shrinks tumors in lung cancer patients even after four or more chemotherapy regimens have failed or become intolerable

Zyvox ¦ a critical advance in antibiotics that can treat patients with infections that have become resistant to what were previously the antibiotics of last resort, such as vancomycin.

 

Why should Medicare just pay whatever prices the drug companies choose to charge, without using the leverage the collective buying power of 41 million Medicare enrollees to negotiate better prices?

Under Medicare's new prescription drug benefit, to go into effect in 2006, drug prices will be negotiated - - but not imposed by the government. Here's how the current law will work:

Older Americans may either choose to have their Medicare benefits provided through the traditional, government fee-for-service Medicare or, during an annual open season, they can instead pick from a variety of private Medicare plans ranging from private fee-for-service to various forms of managed care. If they choose a private plan for their basic Medicare benefit, generally prescription drug coverage will be included as part of the plan. If they choose the traditional government fee-for-service plan, they will have the option of picking from a number of competing "stand-alone" private drug plans.

Thus, prescription drug coverage will not be provided directly through the federal government, but indirectly through private insurance companies, with part of the premium covered by the federal government and part paid by the Medicare enrollee.

These private insurers will negotiate prices with the drug companies, normally by hiring "Pharmacy Benefit Managers" (PBMs) that put together groups not only of Medicare enrollees but also those covered by employer-paid insurance in order to get the large numbers of patients that enable them to negotiate discounted rates with drug companies.

The current Medicare law prevents the federal government from interfering in these negotiations or directly imposing prices - - and it is this provision some are now trying to repeal.

So, under current law, Medicare drug prices will be negotiated by competing private insurers, not simply accepted at a level set by the drug companies. As we will see below, however, there are checks and balances on these negotiations by private parties that help prevent them from driving prices so low as to result in rationing and harm to new drug development - - checks and balances not present when the government sets prices.

 

The government negotiates drug prices for veterans in VA hospitals, servicemen and women in the Department of Defense, and others whose drugs are paid for by tax dollars. Why shouldn't it negotiate drug prices under Medicare?

Drug prices in the Veterans' Administration (VA) program are established by government price controls; they are not the result of any real "negotiation." Drugs sold to the VA, the Department of Defense, the Public Health Service, and the Coast Guard must, by law, be provided at a price that is no more that 76% of the average wholesale market price. Drug companies that refuse to sell at such a price are excluded from the Medicaid program and federally funded clinics.

Drugs sold to the VA and other government agencies covered by this law amount to about 2% of the pharmaceutical market. Federal law also obliges drug companies to "rebate" 11% of the average manufacturer price for Medicaid drugs, which account for 17% of the market.

By contrast, Medicare beneficiaries account for about 40% of the market.

While research and development efforts may not be devastated when drug firms are forced to accept severely depressed prices for 2% of the domestic market, and significantly depressed prices for another 17% of the market, if similar price controls are added to an additional 40% of the market - - so that nearly 60% of the market would be price-controlled - - the impact on research and development of lifesaving drugs would be dramatically devastating and life-costing.

 

If private insurance companies can negotiate drug prices without devastating the research and development of lifesaving drugs, why shouldn't the federal government be able to do the same thing?

The reality is that the government doesn't really "negotiate" prices - - it sets them, for two basic reasons.

First, normal price negotiations occur when there is competition - - a market economy in which there are both suppliers competing against each other to sell, and buyers competing against each other to obtain, goods or services. Most people are familiar with how such a market is distorted when one supplier has a "monopoly" - - when the only way to get a particular good or service is from that supplier, who can then set a price much higher than in a competitive market because buyers who really need the product have no alternative source. However, the reverse is also true. If there are multiple suppliers but only one buyer, there is a "monopsony" - - the one buyer can set a price much lower than in a competitive market because suppliers who need to sell their good or service have no alternative market.

"Pure" monopsonies, where there is literally only one buyer, are rare. However, even when there are multiple buyers, if one buyer dominates the marketplace, that can have a similarly depressing effect on pricing power. Since drug prices are already controlled in just about every other country other than the United States, changing the domestic market so that 60% of it is subject to one buyer, the federal government, would very largely suppress pricing power.

There is always a delicate balance between trying to make the price of drugs more affordable and making the most effective drugs available. The PBMs that will negotiate on behalf of various private insurers with Medicare prescription coverage will indeed have strong incentives to hold down drug prices. However, if they do so to an extent that decreases the availability of effective drugs too much, Medicare beneficiaries will be able to switch to other plans in which effective drugs are more available. The fear of such switching will create a disincentive for the PBMs to fall too much on the side of lower prices at the cost of quality.

If the government has a monopsony on "negotiating" drug prices for all those covered by Medicare, however, the combination of increasing budget pressures and the inability of Medicare beneficiaries to switch will result in strong pressures for low price to trump high quality and effectiveness.

There is a second reason - - beyond the federal government's overbearing share of the market - - why the government would not truly "negotiate" but rather set or control prices for Medicare drugs. The government has coercive measures at its command which an ordinary market participant - - even one representing a large share of the market's buyers - - lacks. If the manufacturer is unwilling to accept the government drug price "offer" for a drug, the government has the ability completely to exclude the drug - - and even other drugs by the same manufacturer - - not only from Medicare but also from other government programs. Indeed, the government uses this authority in the Medicaid and VA health programs.

 

Even if drug price controls would prevent some lifesaving drugs, how can our society afford constantly rising drug prices?

Understandably, people focus on the larger and larger amounts they are spending for drugs and other health care expenses. It's easy to miss the reality that, due to productivity increases, year after year, over the long term American incomes are rising faster than average prices. Indeed, the cost of many things that improve Americans' lives, like computers and other electronics, has been steadily falling. The combined result is that, on average, Americans have more money to spend on other things - - including drugs and other health care.

In fact - - strange as it may seem - - we are spending more on drugs and health care not because we're being forced to do so by rising drug prices, but because we're able to do so because of rising productivity. Much as we groan over our pharmacy bills, when it really comes down to it, they are a worthwhile expenditure. Of course we'd rather spend our money on vacations, sports tickets, and home theaters - - but, to put it bluntly, you can't take a vacation if you're dead.

It is important to understand that spending money on expensive drugs may actually save money in the long run. Often, use of such drugs eliminates the need for still more costly hospitalization or surgery. Moreover, the costs of caring for those who have been denied the benefits of the drugs may greatly exceed the cost of their research and development. Even from a purely economic perspective, consider the enormous savings in assisted-living, nursing home, and home care expenses if, before the baby boom retires, even a very expensive research and development process were to produce even a very costly drug that prevented or cured Alzheimer's disease!

 

Aren't uncontrolled drug prices unfair to the poorest among us? Expensive new drugs may save rich people's lives, but what good do they do those who can't afford to pay for them?

Comparing the use of heart attack drugs in the United States and the Canadian province of Ontario suggests an answer to the question of whether poor people are better off when drug prices are controlled. In the late 1980s, the drug t-PA was found to reduce mortality in heart attack patients more than streptokinase - - but it cost 10 times as much. In Ontario, the government decided to pay the price of streptokinase, but not t-PA. Under Canada's health care system, to ensure equal access regardless of income, Canadians are essentially forbidden to pay for what the government will not reimburse - - meaning that Canadian hospitals could not be paid for t-PA; instead, Canadians of all income levels had access only to streptokinase. In the United States, however, t-PA was available, and, indeed, the uninsured, Medicaid patients, and patients in public hospitals were less likely to get t-PA than those with better insurance. However, even these low-income patients got t-PA about half the time.

How is this possible? When those who can afford to do so pay for drugs at prices not controlled by the government, this puts more funds into the system, allowing "private sector cost-shifting" - - under which drug companies, doctors, and hospitals to a certain extent provide drugs free or at discounted prices to those unable otherwise to afford them.

In short, while controlling drug prices may ensure that middle- and upper-income individuals do not have access to better drugs than those with lower income, they also deny to a significant number of lower-income people drugs they might otherwise receive. Even though those with higher incomes were more likely to get the best drug when drug prices were not controlled, more lower-income people's lives were saved (because many did get the drug) than when price controls denied access to the drug altogether.