Thursday, January 18, 2001

President-elect George W. Bush is coming to Washington with a pledge to work with both parties to secure prescription drug coverage for seniors. If he is not careful, however, Mr. Bush might simply put a bipartisan stamp on a Democratic disaster. Without careful attention to unintended effects, we could find in the future that seniors will get expensive drug coverage but be denied drugs that are never brought to market.

Members of both parties have proposed new entitlements for prescription drug coverage under Medicare. As Congress and the president grapple with the very high costs of these entitlements, they may well be tempted to resort to some form of price controls.

If they do impose price controls on pharmaceuticals as part of prescription coverage, they will add another shortsighted policy to the long list of price-control failures. While the history of price controls is long and miserable enough for those controls that are actually implemented, our research indicates that merely proposing price controls can impose unexpectedly high costs and reduce the quality of health care. Shortly after the 1992 election, the first lady began harsh criticism of pharmaceutical companies. Mrs. Clinton’s criticism was coupled with a credible threat to institute price controls on prescription drugs.

Up to the time of this criticism and threat, research and development at pharmaceutical companies had been growing at double-digit rates. (From 1980 to 1992 the growth rates varied from a minimum of 13 percent to more than 20 percent).

The companies were responding to the demands for new therapies that would provide more effective treatment than existing therapies, frequently at lower costs. As investor-owned firms, they naturally were seeking profits, but developing new drugs is not a cheap or quick process. Recent studies indicate it costs about $500 million and takes nearly 15 years to bring a new drug to market.

Faced with the threat of price controls and sharply reduced profitability for the research pharmaceutical companies, capital did what it always does it sought out higher expected returns elsewhere. Growth in research-and-development spending dropped dramatically to 6 percent and 7 percent for 1994 and 1995, the years for which the threat was most credible given the lags in capital budgeting. Simple linear models and econometric time-series models reach the same conclusion: Under the threat of price controls, R&D spending fell. We estimate the effect at about $1.1 billion for just those two years.

It doesn’t stop there. Because of the long lag structure of pharmaceutical research and development, one-time shocks to R&D spending don’t just go away. In the years since 1995, we estimate that cumulative pharmaceutical R&D may be $7 billion below what it otherwise would have been enough to develop and bring to market 14 new drugs.

In the end, Mrs. Clinton’s proposed government takeover of health care failed and her task force’s secret deliberations were discredited. However, the threat alone was enough to slow R&D on drugs that could even now be saving lives.

It is always difficult to infer “what might have been.” No one can know what might have happened, had research and development continued on its long-term trend. But government ignores the realities of markets at the peril of the whole country.

The Bush-Cheney campaign platform endorsed a flexible, market-oriented prescription plan within a broader reform of Social Security. This is an approach that is less susceptible to heavy-handed regulatory interference, such as price controls.

The rhetoric of Al Gore included rants against excess pharmaceutical profits and “misspent” research and development funds. This rhetoric implies a desire for significant government controls. Let us hope that this doesn’t represent the attitude of the Democratic leadership in Congress. History shows that the threat of price controls had serious adverse effects on pharmaceutical research and development. Actually implementing controls would be much worse.

The near balance in both houses of Congress requires a bipartisan approach to prescription coverage. Bipartisan leadership can mean winning over support as much as or more than giving in to opponents. It would be best for Mr. Bush to spend his efforts convincing a bipartisan coalition of the rightness of his market-oriented approach. He needs to make clear that shackling the drug industry for dubious, short-run budgetary convenience would harm our health, as well as our economy.

Instead of trying to win Democrats to his plan he could spend his efforts assembling support by cutting and pasting from competing proposals. The likely result would be legislation poisoned by controls and toxic to the forces necessary for the continued, robust improvement in our drug arsenal.

It is no small feat for a president to unite a bipartisan coalition and forge legislation. It is no useful feat if the legislation is harmful.

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