Subsidizing Prescription Drugs: An Ill-Advised Path

Published November 1, 2001

While federal officials ponder how to create a new federal entitlement for prescription drugs, many states already have ventured down this ill-advised path.

An article in The New York Times on April 23 explained that 26 states were in one way or another subsidizing prescription drug coverage.

The Times went on to highlight the various types of programs being offered. For example, some states “use state money to pay part of the cost of each prescription.” Others place limits on the prices pharmacies can charge elderly patients; others received permission to use Medicaid programs for drug discounts to people who do not qualify for Medicaid; and others used their Medicaid purchasing clout to force discounts from manufacturers.

States that Subsidize
Prescription Drugs
New Hampshire
New Jersey
New York
North Carolina
Rhode Island
South Carolina
West Virginia
New York Times, April 23, 2001

If government is going to foolishly venture down the path of subsidizing prescription drugs, then having the various states figure out how to do it probably would inflict the least damage. That is, compared to a federal program, such as expanding Medicare with a prescription drug program, as almost every federal elected official wants to do these days.

Damage Will Be Done

But make no mistake, no matter which level of government gets involved, damage will be done.

Remember what happens when government picks up more and more of the health care bill. As an ever-greater share of spending is funded by a third-party payer, the health care consumer and provider have fewer incentives to be concerned about costs. Demand is pushed higher, along with prices. And since there are no real incentives to control costs in government, matters only grow worse when government is the third party picking up the tab. Taxpayer costs skyrocket. Eventually, rationing and price controls become realities.

Once government starts picking up increasing shares of the prescription drug bill in this nation, rationing and price controls will be inevitable. It will only be a question of when, not if.

Rationing simply means the government will dictate which drugs individuals can have access to, and which ones they cannot. Health care decision-making is placed in the hands of government bureaucrats and politicians.

Meanwhile, price controls result in fewer drug innovations, improvements, and discoveries. If the government resorts to price controls, then fewer resources would be available for investing in new treatments. Indeed, the incentives to undertake the very risky and costly enterprise of researching, testing, and bringing new and improved drugs to the marketplace would be destroyed.

Deregulate and Cut Taxes Instead

If federal and state government officials are truly concerned about access to affordable, life-enhancing, life-saving drugs, they should not be looking to establish government subsidies that will inevitably lead to rationing and price controls.

Instead, they should be deregulating and cutting taxes to reduce the costs imposed on insurers, drug makers, medical device manufacturers, and other health care providers.

And perhaps most important, tax-free medical savings accounts (MSAs) should be made available to all health care consumers, including Medicare and Medicaid recipients. MSAs tied to traditional catastrophic insurance allow consumers to make their own medical decisions; resolve third-party payer woes; allow savings to build up; cover prescription drugs; and protect people against the costs of catastrophic illness.

The prevailing thinking in political circles is to increase subsidies for prescription drugs. In reality, though, what we need is more choice in the marketplace. Competition works; government doesn’t.

Raymond J. Keating is chief economist for the Small Business Survival Committee and coauthor of U.S. by the Numbers: Figuring What’s Left, Right, and Wrong With America State by State (Capital Books, 2000). His email address is [email protected].

For more information . . .

For a copy of “Medical Savings Accounts: The Necessary Centerpiece of Health Care Reform,” released by the Small Business Survival Committee in April 2001, visit the group’s Website at or call 202/785-0238.