“Bush offers prescription drug benefit” is the headline on the front page of my local newspaper recently. On the business page, a story headlined “Health care premiums up 10% to 30%,” notes such increases are “driven largely by escalating drug costs.” And on my radio, a campaign ad promises that a candidate will “lower drug prices for everyone.”
Drug costs have, indeed, emerged as the hot button issue in the 2000 campaign. Every candidate seems to think they are too high or impose undue burdens on poorer households. Most candidates think that government should do something about it.
The question is what.
Presidential candidates Bush and Gore have now both offered plans for lowering the burden of prescription drug costs for retirees. In economic terms, the two plans are not that far apart.
The Bush plan includes a means test and projects a 10-year cost to the Treasury of about $160 billion. His plan would subsidize the purchase of private insurance with a prescription drug benefit. About a third of the projected cost would be funds given to states for immediate programs to help financially pressed seniors.
The Gore plan would apply to nearly all retirees and is projected to cost about $100 billion more that the Bush plan. The funds largely would be disbursed through existing Medicare reimbursement channels.
Both Bush and Gore would have the government assume all drug costs that passed some threshold amount, $4,000 for the Gore plan and $6,000 for Bush.
While the media are presenting elaborate side-by-side comparisons of the two plans and both candidates are trashing each other’s proposals, there really are few substantial differences. I think it likely that some plan midway between the two will be passed through Congress regardless of who is elected.
Both will spread the high drug expenditures currently hitting a minority of households more broadly over taxpayers as a whole. Both will increase fairness in the eyes of many.
Neither does anything substantive to control costs or improve economic efficiency.
The 10-year projected costs of both are highly suspect. If you doubt that, go back and look at Medicare’s projected costs when first passed 35 years ago and what they actually turned out to be.
Other proposals currently being voiced include prohibiting drug companies from charging any more in the United States than they do in foreign countries. This is ironic given that only weeks ago, during the annual AIDS conference, the same firms were castigated for not lowering prices enough in poorer countries. Presumably the advocates of price equalization across borders will relent and limit U.S. prices to parity with those in Canada or Western Europe.
Most of these countries have state-run, single-payer systems that negotiate for purchases of drugs and other inputs. Tying U.S. prices to such systems will be another step toward bilateral oligopoly, with a limited number of drug firms on the supply side and a limited number of national health plans on the other.
This might be similar to the bilateral monopoly that exists in warships. The U.S. Navy is the world’s only buyer of nuclear submarines and aircraft carriers. The Electric Boat division of General Dynamics and Newport News Shipbuilding are respectively the only sellers of the same.
The economic outcome of such bilateral concentration of market power is difficult to estimate before the fact. But I would be very cautious about seeing this as a panacea for all complaints about drug costs.
The same is true of proposals, already enacted into law in Maine and proposed elsewhere, that would effectively make the state the drug buyer or price determiner for all citizens who did not have insurance coverage. It seems clear that the pharmaceutical industry will challenge the constitutionality of the Maine law.
That issue aside, it is hard to determine the long-term economic ramifications of such laws. They likely will hold down the cost of drugs to consumers. Whether you think such savings will come out of exorbitant drug company profits or reduced R & D budgets depends on your political biases.
The unifying motif in all these proposals is a focus on treating a symptom, high drug prices, rather than the larger underlying phenomenon of unrationed health care.
Throughout all of human existence, every society eventually must weigh the cost and the benefit of every possible good or service. A society may do so through market mechanisms, as we do with most goods from aspirin to zithers, or through the political process, as we do for nuclear subs and sewage treatment plants. In the long run, prescription drugs will not be an exception to that general rule.
None of these recent proposals acknowledge that reality. None reduce the cost of developing new drugs. None reduce consumer’s demand for new medicines that will extend their lives or make them more comfortable.
Until we address the larger issue of benefit vs. cost to society as a whole, the issue of prescription medicine costs will stay with us.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.