Price negotiating's hidden costs

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Everyone wants to make sure that America's seniors get the prescription drugs they need at the best possible price. But the proposal to have the government negotiate Medicare drug costs that the Democratic leadership hopes to ram through the House of Representatives this week will either be largely ineffective, or it will cause undesirable results: it will restrict seniors' choices, devastate local pharmacies, raise prescription drug costs for veterans and stifle innovation.

The Democratic proposal that was introduced last Friday would require the secretary of Health and Human Services to negotiate to reduce Medicare prescription-drug prices without limiting the prescription medications seniors can have access to. But allowing the HHS secretary to negotiate without being able to reduce the list of medications would be largely ineffective. As the nonpartisan Congressional Budget Office has found, government-negotiated prices for prescription drugs will not produce significant savings. Because the plans that Medicare already uses are successfully negotiating discounts for drugs, CBO found that "the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree."

It is clear, based on experience with other programs in which the government tries to negotiate discounts, that if there are savings, they will come from reduced choice for seniors and other Medicare beneficiaries. For example, the Veterans Administration -- frequently cited by supporters of Medicare negotiation as a model -- offers less than one-third of the medications that seniors can currently receive under Medicare plans. Similarly, several state Medicaid programs limit the number of prescriptions beneficiaries can get, and often make beneficiaries and their physicians go through difficult administrative procedures to get the drugs they need. The United Kingdom's National Health Service -- another example Democrats cite -- frequently denies patients access to new life-saving medicines, including, in one well-known recent case, the revolutionary new breast cancer drug Herceptin.

One other way that the government can hold down prices is by limiting patients' access to community pharmacies. The Veterans Administration distributes most of its medications through its network of VA hospitals and clinics, or by mail. As many as 80 percent of veterans currently get their drugs through mail order, compared with only 2 percent of Medicare beneficiaries. Since veterans are a relatively small part of the drug market, that doesn't have too much impact on our pharmacies. But shifting the 42 million Medicare beneficiaries to the VA model would destroy local pharmacies -- often the center of small-town life in America, and a valuable resource for seniors to receive counseling from a local pharmacist.

There are a number of reasons that the Veterans Administration can now offer lower prescription drug prices than Medicare, but simple economics shows that if the VA model is expanded to include all Medicare beneficiaries, America's veterans will face higher prescription drug costs. Under current law, the Veterans Administration is guaranteed a substantial discount (24 percent) off the market price of brand-name medications, and then negotiates from there. Pharmaceutical manufacturers can offer the VA such discounts because veterans represent only about 2 percent of the market for prescription drugs.

If the tens of millions of Americans who receive Medicare -- who are responsible for over 40 percent of all spending on prescription drugs -- are added to the government-negotiated-price drug market, that arrangement will be untenable. Prices for our veterans -- the elderly survivors of the Greatest Generation who served in Europe and the Pacific, as well as young men and women returning from Afghanistan and Iraq, and everyone in between -- will rise substantially.

What does the Democratic government-price-control legislation mean for innovative treatments just being developed? Will Medicare beneficiaries be denied groundbreaking new medications in the future? According to one recent study, it costs over $800 million to develop and get government approval for one new prescription drug. It is important to recognize that the modern American pharmaceutical industry is not organized like a Thomas Nast cartoon. It is not a gang of old men in pinstriped suits smoking cigars and plotting to exploit older Americans.

The profits that drug companies make on successful drugs pay for the research that creates new medicines. For each drug that successfully reaches the market, more than 500 don't pan out. If the government squeezes these companies by arbitrarily cutting payments, the sure and certain result will be less research and fewer new cures.

Changes in the system for Medicare prescription drugs affect practically every American -- those in the Medicare system, those who receive their medication from the Veterans Administration, and every American who hopes to benefit from new medications that could hold the key to curing or treating Alzheimer's, breast cancer, or Parkinson's disease. These changes are far too important to be rushed through the House for political gain or a soundbite about the "100 Hours." The plan that is in place under Medicare Part D is working, and working well, for the benefit of seniors. The Democratic plan before the House offers nothing but the prospect of a diminished benefit due to heavy-handed government control of this important program.

Rep. Jim McCrery of Louisiana is the ranking Republican on the House Ways and Means Committee.