An Election on Drugs

Thursday, November 2, 2006

ONE OF the Democrats' election talking points is a promise to revamp the Medicare prescription drug benefit. They paint the 2003 legislation as a sellout to pharmaceutical firms: Rather than having Medicare officials use the government's bargaining power to keep drug prices down, the law left the job of negotiating prices to private insurers. The Medicare drug benefit has actually turned out to be cheaper than projected, and most beneficiaries say they are satisfied with it. But the House Democratic leader, Nancy Pelosi (Calif.), nonetheless accuses Republicans of "putting pharmaceutical companies and HMOs first at the expense of America's seniors."

The Democrats rightly point out that the federal health program for veterans uses its purchasing power to secure drugs at prices lower than the average obtained by the private insurers that administer the Medicare benefit. But this is not a fair comparison. The veterans program keeps prices down partly by maintaining a sparse network of pharmacies and delivering three-quarters of its prescriptions by mail, a policy that might not appeal to retirees who want a local pharmacist. Moreover, the program for veterans is in a position to negotiate hard with drugmakers because it can credibly threaten not to buy from them: Its plan excludes many new medicines. More than a third of retired veterans have signed up for Medicare drug coverage, suggesting that while the veterans program is cheaper, its restricted pharmacy network and formulary render it less attractive.

Setting the veterans comparison aside, could Medicare officials save money by negotiating directly with drug companies? In theory, yes: Once a drug has been invented, the cost of manufacturing pills is low, so a huge purchaser such as Medicare could demand large discounts and still find willing sellers. This is what governments do in most other rich countries. But lower prices might reduce drug companies' incentive to invest in research, and although it is infuriating that Canadians and Europeans get discounts while Americans finance pharmaceutical advances, slowing that advance may not make the world better. Moreover, having the government set drug prices is a sure way of flooding the political system with yet more pharmaceutical lobbyists and campaign spending.

The best way to make the difficult trade-off between affordable drugs and incentives for new research is not to stage a showdown in Gucci Gulch but rather to heed signals from consumers. The existing Medicare drug benefit may ultimately generate such signals. Retirees have a choice of insurance plans with wildly varying costs, and some are faced with decisions on how much to spend out of pocket. If they choose to pay top dollar for branded medicines, the incentives to invent new medicines will rise; if they prefer to save money, incentives for innovation will decline a bit. Either way, a balance will be struck that reflects broad social preferences.

It's fair to object that consumers may not be equipped to make smart decisions; the market signals they send may reflect the success of gauzy drug commercials rather than clinical evidence. The attraction of the market-based model depends on consumers being guided more by science-based Web sites created by universities or other groups. It's an open question whether consumers, led perhaps by their insurers, will learn to make sophisticated drug choices, but the fact that Medicare patients already buy more generic medications than other Americans is an encouraging sign of the capacity for smart purchasing. A switch to government purchasing of Medicare drugs would choke off this experiment before it had a chance to play out, and it would usher in its own problems. For the moment, the Democrats would do better to invest their health-care energy elsewhere.

© 2006 The Washington Post Company