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Should
the Federal Government act on the high cost of
Prescription Drugs?
In 1980 Americans spent an average of $92 per person on prescription
drugs. By 1998 that figure had risen to $391 per person. Further, a newly
released study shows that prescription drug spending increased another
17.4% in 1999. Imagine the public outrage if food or fuel costs had risen
at that pace?
Most of the public has not been up in arms about rising drug prices
because most working Americans are buffered from these increases through
their employer-based health insurance plans.
But one group of people is keenly aware of the high cost of prescription
drugs—senior citizens. Many senior citizens feel the full impact of
rising drug prices in their own pockets. Since Medicare does not cover the
cost of outpatient prescription drugs, any senior who does not have some
other form of insurance bears the full brunt of rising drug costs. It is
not surprising that this is the group most vocal about drug prices.
And it is also not surprising that the issue is finding its way into this
year's political campaigns, particularly in states that border Canada and
Mexico. Already this year, senate candidates from
Montana, Minnesota and Nevada have taken highly publicized trips across
their borders to help seniors purchase prescription drugs at significantly
lower prices than they can find at home.
The Issue for Policy Makers
So, what is the real story on drug prices? Are they excessive and, if so,
should that matter to policy makers?
One
thing we know for certain: When the public feels it is being "ripped
off" for life's necessities, people place real pressure on their
elected officials to correct the situation. Before policy makers can make
reasonable policies, however, they need to figure out what is actually
happening.
It is clear that extensive research and development over the past decade
have led to many new prescription drug therapies. In some cases new drugs
have entirely replaced old treatments, even eliminating the need for
surgery in some illnesses. An obvious result of all this activity is that
prescription drugs, as needed components of our total health care system,
have grown in importance and cost.
The second thing we know is that there are dramatic differences in price
for the same drug in different countries, with costs usually being higher
here. For instance, the new ulcer drug Prilosec costs $3.80 a day for
patients in the U.S. The same drug costs $1.47 a day in Canada, $1.67 a
day in Britain, $1.29 a day in Australia and 99 cents a day in Mexico. It
is no wonder so many American seniors buy drugs in Canada and Mexico.
Industry officials say that higher prices are necessary to pay for
research and development, and they go on to note that prices for things
like college tuition are also higher in the U.S. This kind of logic,
however, appears foolish to the "man in the street".
Professor Patricia Danzon of the Wharton School of Management in
Pennsylvania has done extensive work on international price differentials
for pharmaceuticals. She notes that many previous studies were done
incorrectly and therefore are biased against the industry, but even her
work reflects significant price differentials between the U.S. and other
industrialized nations, with France, Italy, Japan and the U.K. showing
significantly lower prices than the U.S. In addition to international
price differentials there are significant price differentials within the
U.S. A recent study shows the federal Medicare program paying almost 7
times (47 cents vs. 7 cents) the amount the Veterans Administration is
paying for one milligram of the asthma drug Albuterol. Further, this drug
costs 38 cents per milligram at chain pharmacies, 25 cents at internet
pharmacies, and 24 cents to the Medicaid program. When people learn about
these types of situations they become very suspicious and urge their
political leaders to act.
Possible Policy Choices
There are a variety of ways public policy can address the problems of
excessive pricing or arbitrary price disparities. Some proposals that have
been discussed include:
1. Creating a new prescription drug benefit for the elderly to deal with
price pressures on the people most affected and most vocal about the issue
- this has happened in several states,
2. Imposing some form of government price controls - this will be tried in
Maine under a strong law passed this May,
3. Taking tax breaks away from companies that engage in profiteering -
this has been proposed by Senator Paul Wellstone of Minnesota,
4. Facilitating the importation and re-importation of FDA-approved
prescription drugs - bills that would accomplish this have been introduced
by Senator Byron Dorgan of North Dakota and Congressman Gil Gutknecht of
Minnesota,
5. Requiring a return for the government on profits from drugs that are
developed as a result of federally funded scientific research – this is
being proposed by Senator Ron Wyden of Oregon and Congressman Bill Thomas
of California. An amendment to implement this idea was added to the Senate
version of the appropriation bill for the National Institutes of Health (NIH)
by Senator Wyden, and
6.
Requiring "reasonable pricing" of drugs developed with
government resources. This proposal was added to the House appropriation
bill for NIH by Congressmen Bernie Sanders from Vermont. Under the Sanders
amendment, the NIH would be required to include a "reasonable pricing
clause" whenever it enters into a cooperative agreement with a
pharmaceutical company for research and development of a new drug. (An
effort was made to do this during the Bush Administration when Bernadine
Healy headed the National Institutes of Health. It was abandoned, however,
when the agreements proved too difficult to negotiate.) Although the
amendment was supported overwhelmingly in the House, it remains to be seen
whether the provision will survive an appropriation conference between the
House and Senate.
Many people argue that this is none of the government's business and we
should just let the "market" decide. Others point out that there
are already several places where the government
and the pharmaceutical industry intersect. From FDA regulation
ensuring consumer safety, to federal funding of scientific research, to
patent enforcement protecting the intellectual property rights of drug
companies, to federal tax breaks for research and development - the
government and the pharmaceutical industry have long been linked together.
And the American taxpayer has long supported this industry.
Currently the most serious policy response to escalating drug prices is
seen in Administration and Congressional efforts to design some type of
Medicare drug benefit for seniors. This debate is proving quite intense
and I will share my views on the different proposals soon. One thing you
can be sure of—if efforts fail and drug prices continue to escalate,
there will be increased public pressure on Congress to solve this problem.
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