Drug Plan: Prescription for Disaster

Why is it that when it comes to medical care, policy makers in Washington can always be counted on to abandon every sound economic principle that works to create wealth and improve services in every other sector of the economy?

The prescription drug benefit for seniors that was moving through the U.S. Senate last week pushes us another step closer to the Hillary Clinton/Ted Kennedy dream of socialized medicine. What’s worse, it could very well wreck one of America’s most profitable, globally competitive industries, one that saves millions of lives.

In every other sector of the economy we understand the economic realities that have fostered prosperity and abundance. We understand that free-market mechanisms work better than government command-and-control solutions. We understand that maximizing consumer choice and competition creates better services and drives down costs. We have learned that price controls never produce desired results and almost always create shortages. Even politicians now understand the economic reality that open-ended new government entitlements have been a road map to horrendous budget deficits and runaway spending.

Yet, Congress is perilously close to violating every one of these tenets in the area of prescription drugs.

Here is the immutable economic reality of the medical industry: Drugs and new treatments save millions of lives. But newly invented FDA-approved drugs and vaccines are, by their nature, extremely expensive when they come to the market. To give seniors all the new drugs they want at a subsidized price could well bankrupt the nation. We can’t afford to give every senior every new drug, anymore than Uncle Sam can build a swimming pool in every American’s back yard.

The free market solves the problem of high drug prices by driving prices down over time-just as cellular phones and VCRs have become cheaper. Here is the dilemma that Congress faces: If the government subsidizes drug purchases for seniors, either we let taxpayers shoulder the weighty financial burden through much higher taxes (after all, there is no such thing as a free lunch, someone has to pay), or we pretend there is a free lunch by imposing price controls on the drug industry and take the money out of its profits.

Those are the only two viable options given the expensive proposal for a Medicare prescription drug benefit. Both are rotten options.

Fiscal Black Hole

If we demand taxpayers shoulder the cost, we will create a fiscal black hole future generations may never climb out of. We should recognize a few fiscal realities about the prescription drug plan:

1. The history of Medicare is that the actual costs always far exceed the predicted costs. When Medicare was launched in 1965 it was expected to cost $15 billion in 1992. Instead it cost $90 billion. The program was six times more expensive than anticipated. Same with Medicaid. And the same would almost certainly be true of a Medicare prescription drug benefit.

2. Medicare’s unfunded liability is $12.9 trillion; Social Security’s is $11 trillion. The expected unfunded liability of prescription drugs over 75 years is expected to be $3 to $7 trillion. These are trillions-a million million dollars. To put this into context: The value of all the assets of the Fortune 500 companies is less than $5 trillion. There is a wise old axiom: When you are in a hole, stop digging. The prescription drug benefit will drill us further into financial bankruptcy at a time when we should be reining in entitlements-especially for seniors.

3. The prescription drug benefit will almost certainly cause drug prices to rise absent price controls. Medicare and Medicaid created the stampeding inflation in health care. In the 15 years prior to Medicare and Medicaid, health costs grew 3.4% per year. But since 1966, health care costs have grown at 7% per year, almost twice the level of overall inflation. We can expect drug prices to rise in a similar runaway pattern if government gets into that business, too.

4. As life expectancy rises, the cost of drug benefits to seniors will grow very rapidly as we pay to keep Americans alive in their last years of life. In just the next eight years, the Health Care Financing Administration predicts spending on prescription drugs will rise from $100 billion to $250 billion.

Can the next generation afford the tax burden required to pay for this new drug benefit? The National Center for Policy Analysis says that to pay for existing promised Medicare and Social Security benefits Americans will be forced to pay a payroll tax of not 15% but 25% by 2025. Add to that a prescription drug benefit and the payroll tax could easily rise to nearly 30% of a worker’s paycheck. We could see a tax revolt in America that would make the Boston Tea Party seem like a day at the park.

Now Sen. Ted Kennedy (D.-Mass.) and liberal think tanks are saying there is another way to pay for drug benefits: Take it out of the hide of the industry that provides us with these wonder drugs. Under the current construct of the drug benefit, the government would soon become the single payer for drugs, which would give the Health Care Finance Administration virtually unlimited monopsony power over the industry. The temptation to limit prices for profitable drug companies could be politically irresistible. In fact, almost all other countries impose price controls on U.S. drugs, so that the price in Canada for prescription drugs is often less than half what is charged here.

Free Riders

Why not impose similar controls here to save money? The answer is most of the rest of the world has become a free rider on the backs of the U.S. drug industry. Foreign price controls lower drug research and development incentives-pure and simple. In the long term these price controls will prevent sick people from getting healthier by depriving them of new drugs that would be brought to market earlier in the absence of price controls.

If the U.S. follows suit, the results could be catastrophic. As by far the largest market for new drugs, the U.S. now shoulders the burden of providing fair profits for the industry. If the U.S. imposed price controls, we would see a sharp reduction and delay in the introduction of new drugs. There is no getting around this economic reality.

For Americans who suffer debilitating diseases, the harm of delaying even for a few years new drug patents for heart disease, cancer, and the like is substantially greater than the short-term benefit of lower prices. After all, if you suffer from the crippling effects of rheumatoid arthritis, what are you willing to pay for a drug that relieves your suffering and allows you to walk? In the long term, miracle drugs are the cheapest way to treat disease, so price controls probably lose money for society in the long term.

Some liberals say, well, then, let’s have the government develop the new drugs through organizations like the National Institute of Health. The problem is that while the NIH does an invaluable job of basic research in biomedicine, almost all of the exciting and life-saving new drugs and vaccines of the past 25 years have been developed by private firms, and these new wonder drugs are financed with private risk capital.

It is quite possible that within the next 20 years the stunningly successful private-sector U.S. pharmaceutical industry will develop amazing new treatments for cancer, heart disease, multiple sclerosis, AIDS, Lou Gehrig’s Disease, asthma, epilepsy and on and on. This is an industry that makes big profits, but those profits are dwarfed by the benefit society reaps in diminished suffering from disease.

Rather than subsidizing new drugs for seniors, the government should withdraw completely from this industry. The free enterprise system will bring new life-saving drugs to market more rapidly and more affordably in the long term if Congress simply got out of the way. That would be good for seniors, for taxpayers, and for all who suffer from treatable disease.