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Prescription drug costs

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Politics is the art of wealth redistribution; but it is also a struggle over the fundamental principles that decide specific policy outcomes. Nowhere is this reality clearer than in the looming battle over federal negotiation of prices and formularies (lists of approved drugs) for the new Medicare Part D drug benefit.

The leaderships of the incoming congressional majorities ask why the federal government should not use its massive buying power to drive harder bargains with the pharmaceutical producers. But that narrow question obscures a deeper goal: a U.S. health-care sector driven primarily by government agencies and political imperatives rather than competitive market institutions.

Current law proscribes the feds from Part D negotiations, leaving that role instead to the private-sector companies (pharmacy benefit managers) that manage plans on behalf of their enrolled patients. Since the implementation of Part D, the average monthly premium paid by seniors has fallen about 35 percent below that projected originally by government experts. From an average of about 40 plans available in 2006, seniors in most states in 2007 will have over 50 options. Because of this intense competition, most of the PBM formularies list virtually all of the drugs -- well over 4000 -- allowed under Part D.

The PBMs must satisfy customers seeking both low prices and extensive formularies. The pharmaceutical producers must preserve their market shares and recover the enormous investments (about $1 billion each) embodied in new medicines. And so prices negotiated between the PBMs and the pharmaceutical producers can be shown to yield substantial savings for patients, extensive formularies, and the preservation of incentives for the research and development of new and improved medicines.

The federal government, on the other hand, does not have customers; it has interest groups struggling over shares of the federal budget. Accordingly, political incentives to achieve budget savings by driving prices down would be powerful, while incentives to satisfy patient preferences for more-inclusive formularies would be weakened, as the dissatisfaction of patients would be offset to some degree by the applause of other constituencies made happier by increases in their favored programs.

The drug program administered by the Department of Veterans Affairs often is cited, somewhat inaccurately, as a "negotiating" model for Part D. The VA formulary has far fewer drugs than virtually all of the private Part D formularies; it includes only 38 percent of the drugs approved by the FDA during the 1990s, only 19 percent of the drugs approved since 2000, and only 22 percent of the drugs given priority review approval since 1997. VA prescriptions systematically are for drugs older than those specified in non-VA prescriptions, and new drugs as a matter of VA policy are not considered for the VA formulary for three years, regardless of improved effectiveness or reduced side effects.

These differences between the actual results of the competitive Part D program and the administered VA program are stark; why do so many prefer the latter? Part of the answer is obvious: Because most pharmaceuticals are cheap to produce once the huge research and development investments have been made, the imposition of steep price discounts by the feds would not reduce the supply of medicines in the short run. The current system of private competition prevents the government from using its size, its regulatory power, and various types of threats to transfer the wealth inherent in the intellectual property embodied in medicines.

In part, this wealth redistribution imperative explains the hostility of many advocates of federal Part D price negotiations toward the private Medicare Advantage programs. Those programs compete to deliver comprehensive medical benefits for Medicare beneficiaries, and so offer an array of choices greater than that feasible for government bureaucracies. This market competition drives prices toward the net cost of services delivered efficiently, making wealth redistribution more difficult to achieve because prices have to be negotiated rather than merely imposed.

More fundamentally, private competition in the delivery of subsidized medical services is inconsistent with the central ideological goal of the political left: increasing the dependence of ordinary people upon government. Moreover, government by its very nature imposes one-size-fits-all solutions; market competition to satisfy the heterogeneous demands of millions of patients does the opposite. With market competition, "equality" -- health-care services that appear homogeneous across patients but that in reality yield vastly different levels of patient satisfaction -- becomes a mirage. As the experience in Canada and Europe shows, the pursuit of "equality" must result in the formal rationing of health care services because government budgets never can be adequate to finance "free" or "affordable" health care for large populations responding to price incentives.

Such are the deeper implications of the looming battle over federal price negotiations for drugs. The goals of greater dependence upon government, more homogeneity and more wealth redistribution -- more "equality" -- cannot be reconciled with the use of competitive markets to deliver subsidized drug benefits, because market outcomes are starkly superior to the results of ever-more politicized health care programs. And so for the political left, public policies using competitive market processes are unacceptable as a matter of principle. The resulting increase in human suffering is yet another fruit of government compassion.

Benjamin Zycher is a senior fellow at the Manhattan Institute for Policy Research.

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