New Brunswick, NJ, October 7, 2002 — Many critics of the pharmaceutical industry contend that the fastest and easiest way to lower prescription drug costs is for the government to impose price controls. That chorus is gaining momentum in state houses around the nation, as well as in Congress.
Crusaders on both sides of the political aisle clamor for “negotiated prices” so that the federal government can have the same kind of leverage in the marketplace as Wal-Mart, Costco or BJ’s. Sounds good, right?
The timing of this discussion is somewhat ironic in that the Congress and President Bush have finally adopted a Prescription drug benefit under Medicare. The objective of that landmark legislation is to make prescription medicines accessible and affordable to all of America’s seniors.
As we consider how best to implement this important new law, we can all agree that the new drug benefit should strive to use taxpayer funds in the most responsible and cost-effective manner. However, government imposed price controls — often termed “aggregated negotiating,” “bulk purchasing agreements,” “supplemental rebates” and “purchasing coalitions” — will inevitably have a negative effect on patient access to life saving drugs while forcing many patients to pay more, not less for their medications.
While it is true that consumers in some countries, like Canada, pay less for some drugs due to government mandated price controls, it is a flawed model that has significant downsides to people in need of healthcare services. And it is important to recognize that any proposals to inflict price controls on the pharmaceutical industry has a chilling effect on the research and development that brings new cures to patients.
Here are a few eye-opening examples that demonstrate this:
When opponents of the pharmaceutical industry cite successful models of price controls, they immediately turn to Canada. Even though residents of some countries with price controls on their prescription medicines pay less for some drugs, they actually pay more for many others. In many instances, there are some drugs they can’t get at all.
In 1999, Patricia Danzon, a professor at the University of Pennsylvania’s Wharton School of Business, conducted a study comparing drug costs in several countries. Here’s what she found, “Canadian prices are between 13 percent lower and 3 percent higher than the U.S., depending on the price index used. ”
However, her study also concluded that generic drugs — which make up 45 percent of the U.S. prescription drug market — tended to be more expensive in Canada than in the U.S. The biggest problem with implementing price controls, however, may be access. Most Canadian provinces have a review committee that must approve any drug offered for sale. These approved drugs, also known as “formularies,” are an integral part of the price control regime. Between 1998 and 1999 only 25 drugs were listed on the formulary for the province of Ontario, even though nearly a hundred drugs were available. Similarly, the Canadian government ruled that only 24 new drugs could be added to the formulary, even though they reviewed 400 drugs!
The end result is that Canadians are forced to pay extraordinarily high costs for drugs that don’t appear on the formulary and some Canadians actually have to travel into the U.S. to purchase the drugs they need. Another even more important consideration is that price controls stifle innovation and can lead to supply shortages in both the quality and quantity of medications.
Consider the recent flu vaccine shortage. The largest purchaser of the vaccine is the federal Vaccines for Children Program. The program buys up nearly 70 percent of all childhood vaccines at government-set prices and then distributes them to states according to a federally-set formula.
The end result is that vaccines have been distributed to states where there is no epidemic often leaving a shortage where it is needed. Because the government controls the price, the vaccine makers are discouraged from producing more than what the government orders. Vaccine prices have remained stagnant since 1994. Thanks to these price controls, there now are only four developers of childhood vaccines. That’s down from 20 companies just a few years ago.
Even the U.S. Department of Health and Human Services recognizes the consequences to medical innovation if the federal government should choose to impose price controls. In a recent study the Department stated, “There are potentially serious consequences to medical innovation with the implementation of government controls that are inevitably arbitrary and out of touch with the diversity of patients needs and consequences.
If applied broadly in the U.S., government controlled restrictions of new drugs could put the future of medical innovation at risk and may retard advances and treatments in the development and introduction of new products. Government control may reduce or delay access to specific drugs for seniors. ”
In summary, while government imposed price controls might sound like a good idea, in the end they are not in the best interest of patient health. Regulating prices of prescription drugs places unreasonable restrictions on a drug manufacturers ability to attract investments for research and development, and offers no incentives to bear the enormous risk associated with drug discovery.
Most importantly, however, price controls will invariably harm millions of needy patients who are counting on drug manufacturers to develop the next generation of breakthrough medicines.