Capitol Comment 268 – H.R. 644: Price Controls for Seniors’ Prescription Drugs
House Democrats, led by Rep. Tom Allen (D-Maine), have introduced the Prescription Drug Fairness for Seniors Act of 1999 (H.R. 664). More recently, they filed a petition to force a vote on the bill. By instituting price controls through the back door, the bill inflicts rationing on seniors, forces higher medical costs on everyone else, freezes the development of new cures, and means higher taxes for us all.1
The bill would require pharmaceutical companies to sell any drugs covered by Medicare to retail pharmacies in specified quantities at a specified price. To be more precise, drug companies would have to make medicines available to every retail pharmacy at the lowest price it had given any other customer, and in the quantity that each pharmacy resells those medicines to Medicare beneficiaries. This discount is significant: in some cases, pharmacies could purchase medicines at a discount of at least 24 percent of the average non-federal wholesale price.2 It is important to note that the legislation does not require those pharmacies to resell the products to Medicare beneficiaries or to resell them at any particular price. As Representative Bill Thomas (R-Calif.) has said, “the Allen bill is getting good press because it says you can get prescription drugs for 50 cents on the dollar.”
Source: Marilyn Werber Serafini, “Prescription 2000,” National Journal, April 24, 1999, p. 1105.
Though the Allen bill attempts to give Medicare beneficiaries access to medicine at lower prices, it would have much broader economic effects. One consequence – surely unintended – is that drug prices would rise for many other purchasers. Organizations that purchase pharmaceuticals in large quantities, such as government agencies or HMOs, are often able to leverage their economies of scale to negotiate a discounted price, similar to large purchasers in other markets. Manufacturers would be less likely to give sizable discounts to health insurers, HMOs, and state and federal government agencies if they are required to extend those discounts to a larger portion of the retail market. Medicare, Medicaid, state health care programs, private health insurers, and HMOs would then have to pay more for the affected medicines, costing taxpayers and individuals with private insurance billions of dollars. The bill essentially amounts to a tax increase to subsidize seniors’ medicines.
On the other hand, seniors would be hurt by a second unintended consequence of this legislation: fewer medicines to treat their ailments. In some cases, pharmaceutical companies would continue to sell medicines at a discount to large purchasers, either because they must by law (to the Veterans’ Administration) or because those customers exert market power. Those discounts would then be available to retail pharmacies. Pharmaceutical companies would have to absorb the cost of these discounts. Lower returns would discourage investors from funding research into new medicines, particularly for seniors, because they would be less likely to receive a return on investing in the search for cures for illnesses suffered by this demographic group. This problem is not trivial: the pharmaceutical industry, as a whole, spent approximately $17 billion in 1998, or 20 percent of all their domestic revenues, in the research and development of new medicines.3
While promising seniors lower prices for medicine, the proposal ignores how markets work. Its market effects – higher health care premiums and costs, less research into new cures – would be grave, but not immediate. In the meantime (during their campaigns for re-election), the legislation’s sponsors could claim credit for giving seniors a “free lunch.” Even worse, the Allen bill fails to provide any real, long-term solutions for Medicare.
1 Sen. Kennedy later introduced a companion bill, S. 731.
2 The Veterans Health Care Act of 1992 (P.L. 102-585) requires manufacturers of “innovator” drugs to provide discounts to the Veterans’ Administration, Department of Defense, Public Health Service and Indian Health Service of at least 24 percent from the average price for non-federal purchasers.
3 Pharmaceutical Research and Manufacturers Association, Pharmaceutical Industry Profile 1999, Figure 2-1.