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Public Commentary Emboldened by their landslide victory, the Democrats have vowed to put prescription drugs back on the congressional agenda. But this time, they're back with an old and unwelcome twist: price controls. For those of us who are old enough to remember the gas crisis of the 1970s, "price controls" are a four-letter word. They were meant to control 1970s era-inflation, but they actually resulted in higher pump prices and shortages, which weren't alleviated until President Reagan removed the controls in the 1980s. The same thing happened with airfares. When price controls were finally removed in 1981, prices fell dramatically. qIn fact, even the prospect of price controls creates havoc. Research and development on new drugs plummeted in 1993 after President Clinton announced a proposal to let the government set prices for "breakthrough" drugs. It wasn't until Congress rejected Clinton's healthcare proposal in 1996 that R&D on new drugs returned to its normal level. With all this evidence, you'd think that even folks in Washington would learn the lessons of history. But they haven't. Instead, they've simply learned to disguise their true intentions. That's why the leading voices in this effort aren't calling them "price controls" any more. They're now using the term "price negotiations" - insisting that government should simply be allowed to "negotiate" drug prices. But the federal government is far too powerful to negotiate on a level playing field. Indeed, it even has the power to impose legal regulations on its contractors. One such regulation almost certain to result from "negotiated prices" would be the creation of a single national list of drugs, the so-called "formulary." Seniors would then be forced to choose their drugs from the list rather then from the wide variety of formularies that vary from insurance plan to insurance plan under current law. Thus, "negotiated prices" will lead directly to the rationing of drugs that are not included on the national formulary. In other words, negotiating with the government is like playing baseball against a team whose pitcher is also the umpire calling the strikes. The game is fixed. By forcing the nation's pharmaceutical companies to sell drugs below their market value, Washington's efforts would come with a host of other unintended consequences. There can be little doubt that price controls would raise prices and ration drugs. But they would also discourage research spending on new life-saving and life-extending medications. Worse still, price controls for Medicare prescription drugs would force companies to divert research funds into less risky - but also less promising - product lines that are not under price controls but are of less value to seniors. Take Alzheimer's disease, which affects 10 percent of those over 65 and half of those over 85. If the government decreed that a drug designed to alleviate Alzheimer's be sold at a below-market price, drug companies wouldn't be able to recoup their investments. With caps on prices, they would focus on markets unaffected by price controls and shift resources to develop drugs usable by younger people covered by private insurance. Seniors with diseases like Alzheimer's would be out of luck. The end result would be out-and-out drug rationing to old people. But that's not all, folks. Price controls also would add more bureaucratic red tape, cause shortages of existing drugs, and interfere with individual decisions on healthcare. If you think the outlook for the new Medicare prescription drug program is complicated now, wait until price controls are in the mix. The Medicare drug benefit certainly has its problems. It's the most expensive government entitlement program in history, and will soon surpass Social Security as the nation's largest unfunded liability. But "price negotiations" are hardly a solution. Indeed, nearly all economists agree that they're incredibly damaging. Those who want to improve the Medicare drug benefit should focus their efforts instead on transforming it into a truly marketbased, consumer-driven program.
The writer is the former staff director of the congressional Joint Economic Committee. He currently serves as a consultant to the pharmaceutical industry.
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