Wrong Prescription for High Drug Prices

Published July 1, 2001

One of the Clinton-Gore administration’s final acts before leaving office was to launch a campaign to demonize the nation’s pharmaceutical industry. Although the industry’s products are responsible for nearly doubling human life expectancy during the twentieth century, a posse of government regulators, “public interest” advocates, and trial lawyers was assembled to accuse the industry of charging too much for its products.

Even today, the anti-pharmaceutical industry campaign is going strong. In Illinois, the campaign has taken the form of two recently introduced bills, HB 2470 and HB 2236, that would force pharmaceutical manufacturers to sell their products at steep discounts in order to remain eligible to participate in state Medicaid programs.

House Bill 2470, sponsored by State Representatives Jack Franks (D-Woodstock), Jay Hoffman (D-Collinsville), and 39 cosponsors, and the Senate version sponsored by Senator Ira Silverstein (D-Chicago), amend the Illinois Public Aid Code to expand the number of senior citizens eligible for discounted drug prices based on the Medicaid reimbursement rate. The bill requires pharmacies to implement the drug discount rules as a condition of doing business in the Illinois Medicaid program.

House Bill 2236, also sponsored in the House by Franks, Hoffman, and 60 cosponsors, and by Silverstein in the Senate, creates the Senior Citizen Discount Program Act, which would enable eligible seniors to buy prescription medication at discounted prices if they pay an annual premium into the program. It also would allow the state to “negotiate” rebates with drug manufacturers in an effort to reimburse pharmacies for the cost of providing the Medicaid discount. In other words, the state would extort from drug manufactures the money needed to subsidize lower drug prices.

What’s wrong with these attempts to help seniors save money on their prescription bills? Plenty.

Workability, Constitutionality Questioned

Price controls and forced rebates create an unsustainable market price below the level consumers are willing to pay. In every industry where they have been tried, price controls have discouraged investment in research and development, risk-taking, and marketing. If applied to the pharmaceutical industry, price controls would result in fewer life-saving and pain-relieving drugs in the future.

American drug manufacturers lead the world in discovering, testing, and introducing new drugs, but their leadership comes at a price: They must be allowed to charge “what the market will bear” for the newest drugs on the market. Competition among major drug manufacturers, not government regulation, is the only way to limit prescription drug prices without harming consumers.

Price controls and rebates are also probably unconstitutional. The chief judge of the federal district court in Maine, D. Brock Hornby, accepted that argument in ruling on Maine legislation similar to the Illinois bills. Hornby rejected a part of the Maine program that required drug companies to subsidize discounts extorted by the state. By demanding rebates on drugs sold to wholesalers and distributors in transactions consummated outside the state, Hornby said, Maine was interfering with interstate commerce, in violation of the Constitution.

Dangers of Too-Easy Drug Access

Price controls and rebates artificially inflate demand for prescription drugs by insulating customers from the true cost of the drugs they choose to buy. In the case of senior citizens, many of whom take multiple prescription drugs, too-easy access poses a genuine threat to public health.

Drs. Michael Arnold Glueck and Robert J. Cihak point out that 10 to 20 percent of hospitalizations of seniors are the result of drug side effects and unexpected interactions. According to Glueck and Cihak, “No physician can completely understand all the interactions possible when multiple drugs are used.” A “free” prescription drug benefit will compound what is already a growing public health problem. (See “Unlimited Prescription Drug Coverage May Endanger Seniors,” Health Care News, March 2001.)

Finally, HB 2470 and HB 2236 would disrupt an entire industry to benefit only a few. According to the Health Care Financing Administration (HCFA), over 65 percent of seniors already have some form of insurance or other financial support to pay for their prescribed medications, and another 30 percent have little or no need for medication or for other reasons are not financially affected by current pricing practices.

Some of the remaining 5 percent of uninsured seniors with significant drug costs may need help, but that does not require undermining the quality of service received by the other 95 percent. Missouri and Michigan, for example, have addressed the problem by creating tax credits for seniors to offset the amounts spent on prescriptions. President George W. Bush’s pharmaceutical drug proposal also uses tax credits.

Another workable alternative would be for Illinois legislators to give seniors tax credits equal to the premium of a Medigap Supplement Insurance policy rich in prescription benefits. State officials could negotiate with the state’s largest provider of Medigap policies—Blue Cross/Blue Shield—to develop a plan that uses its market power to buy drugs and sell them to the Medigap policyholders. A similar plan in North Carolina has saved seniors $10 million since its inception in 1998. Colorado, too, recently passed legislation using free-market alternatives to price controls and forced rebates.

This approach, combined with the federal tax credits, will better serve the needs of senior citizens than the medicine maze currently being assembled by Illinois legislators.