Report warns of drug price controls

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Government price controls on prescription drugs -- if enacted -- would hinder the development of new drugs, according to a study released yesterday.

The federal government is not allowed to interfere with price negotiations for prescription drugs that it will begin providing to senior citizens under the Medicare program in 2006. But in the past year, several bills have been introduced to give the government more authority.

Emerging biotechnology companies, in particular, would slash research and development if mandates for lower prices went into effect, said a report commissioned by the Manhattan Institute, a New York, business-oriented public-policy think tank.

The report comes as prescription-drug prices, along with health-insurance premiums, are skyrocketing ahead of the rate of inflation.

Drug manufacturers' prices on average jumped 7.4 percent from September 2003 to September 2004, more than three times the rate of inflation, according to the AARP, the membership group for senior citizens.

The Manhattan Institute study, written by University of Connecticut finance professor John Vernon, took a one-sided approach, researching only the potential downside from putting in price controls that would lower the cost of prescription drugs.

Mr. Vernon said he did not study the benefits of lower prices, but said that in historical context "the reduced spending for research and development outweighed the benefits of lower prices."

He predicted that lower prices also would reduce research and development spending in the industry by 39.4 percent, or $372 billion over the lifetime of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which formed the Medicare prescription drug plan.

Stephen Schondelmeyer, a pharmaceutical economics professor, said the study overlooks several facts, like the numerous government incentives available for pharmaceutical research and development, including tax credits, benefits and grants.

The study also assumes that all research and development funds go to discovering new drugs, when only one-third of the money on average is spent for "innovative drugs," said Mr. Schondelmeyer, of the University of Minnesota.

Emerging companies, especially those borrowing money from outside sources, would be hardest hit by price controls because investors would be less willing to fund drug development in a tighter market, Mr. Vernon said.

Development of a new drug on average costs $802 million, according to a 2003 report in the Journal of Health Economics.

Mr. Vernon based his findings on price controls and negotiations that the government has initiated in the past 40 years.