Mr. President, Don’t Mess with Drug Pricing

Published July 27, 1994

The Clinton Administration says it wants to drive down the cost of prescription drugs. This sounds like a fine idea, but the method being proposed could backfire on consumers.

What the President has in mind is a form of price controls called “unitary pricing.” This would eliminate the free-market system that allows drug companies to offer discounts to health maintenance organizations, hospitals, and other group purchasing organ izations. In place of the free market would come a regulatory system in which drug companies would be required to sell to all purchasers for the same price.

In recent years, group purchasers have negotiated generous discounts from drug manufacturers. They have done so by offering to put a manufacturer’s product on a formulary–a preferred list of drugs. In this way, HMOs and other group purchasing organizatio ns have given preference to some drugs over others–which provides the incentive for a manufacturer to agree to a discount in the first place. Such discounting benefits both drug manufacturers and consumers; it is a form of price competition that is helpi ng to control how much of our national income goes to pay for prescription drugs.

If the Clinton proposal is adopted by Congress, drug manufacturers will be forced to stop offering discounts. Consumers no longer will be free to choose to pay a little more for unrestricted access to prescription drugs at any retail drugstore, or to save money by buying drugs from group purchasing organizations. Under the Clinton plan, drug prices would rise–to the detriment of consumers and business. Beyond that, adoption of the anti-discounting provision would represent a sweeping change in the countr y’s antitrust laws and a dangerous precedent for other groups seeking preferential treatment.

Do we really need controls on drug prices in the first place? Drug price increases are running substantially below the rate of overall medical care inflation and close to the general rate of inflation–3.2 percent for drugs compared to 2.8 percent for all consumer items in 1993. The growing clout of managed care buyers and rising sales of generic drugs are revolutionizing the prescription drug market, making it highly competitive and price-sensitive. The “problem” of rising drug prices already has been so lved by the market.

Affordable health care can be achieved through means far less dangerous to the consumer than controls on drug prices. For example, states can repeal some of the hundreds of insurance coverage mandates that increase the cost of insurance premiums by approximately 20 percent. Congress can revise the tax code to make it more practical for people to choose insurance policies with higher deductibles, while self-insuring for small and routine medical expenses. Congress also can allow the FDA to sp eed up the process of approving new drugs, and bring some rationality to the nation’s malpractice system.

The Senate Finance Committee, which has held hearings on the Clinton health care plan, has promised an open mind and a willingness to substitute alternative reforms as it considers the health care proposal. We can only hope it listens to a growing host of critics of the Clinton plan. The consumer stakes could hardly be higher.

Joseph L. Bast is president of The Heartland Institute, a nonprofit public policy research organization, and coauthor of Why We Spend Too Much on Health Care (1993).