Proposals to import drug price controls could learn from history

By Pete Sepp, President, National Taxpayers Union & NTU Foundation

Prior to announcing in August 1971 his executive order that imposed general wage and price controls, President Richard Nixon had a discussion with Treasury Secretary John Connally that was captured on audiotape. Nixon told Connally, “The difficulty with wage-price controls and a wage board as you well know is that the [expletive deleted] things will not work. They didn’t work even at the end of World War II.”

Though the details differ, the proposal from the U.S. Department of Health and Human Services aimed at reducing prices for certain medications suffers the same problem that Nixon so colorfully enunciated.

In October, HHS issued an Advance Notice of Proposed Rulemaking aimed at reducing what the government pays for types of physician-administered drugs under Medicare Part B. The plan’s most controversial element is to tie some Medicare drug reimbursements to an “international pricing index” that reflects the amounts paid by health care systems in more than a dozen other countries.

As recently as May of this year HHS had signaled opposition to a foreign price index. In its “American Patients First” plan published less than seven months ago, HHS warned that “using the price of a medicine in one or several countries to derive a benchmark” for drug prices in the U.S. would “prevent drug companies from charging market rates for their products, while delaying the availability of new cures to patients living in countries implementing these policies.”

Fast forward to today where proponents of the Medicare Part B proposal have taken pains to differentiate it from straightforward price controls, even though the new plan would appear to signal a reversal from HHS’s position in May. They are saying the project is confined to just one part of Medicare’s drug reimbursement system, and that the overall impact on the market will be carefully calibrated. They maintain that a broad index of foreign prices is fairer and less arbitrary than a top-down regulatory decision to impose a specific price level. They contend as well that the pharmaceutical market is a near monopoly that requires some form of outside price discipline.

The National Taxpayers Union finds these points are not persuasive. HHS’s rulemaking specifically notes that if these pilot initiatives are successful in bringing down costs and preserving quality of care, they will be expanded to the entire country. Moreover, there is no economic advantage to be gained by adopting the command-and-control pricing of other countries. These are often the very same “free riders” benefitting from predominantly U.S. drug discoveries, which require an average of over $2.5 billion to bring to market.

In addition, what some call “monopolies” are in fact patents and intellectual property rights on such discoveries which are a critical element needed for investors to receive an attractive return. To the extent that competition should be more robust, or that patent policies must be reevaluated, these are tough policy questions that public officials cannot duck by simply resorting to the failed tactic of price controls.

Most important, the HHS Part B proposal that promises over $17 billion of savings to Medicare is not as straightforward as it seems. One key factor that has kept prescription drug costs at a roughly constant 10-percent share of national health expenditures is the high (90 percent) utilization rate of generics in the U.S., which acts to offset the high costs of developing new drugs.

But other factors must be considered as well. The National Bureau of Economic Research has concluded that every dollar spent on newer prescription drugs leads to a $2.06 reduction in long-run Medicare expenditures through reduced hospital stays and lower use of other costly therapies. The Congressional Budget Office found that for every one percent increase in prescriptions filled for Medicare participants, spending on medical services within the program fell by 0.2 percent.

U.S. policy toward pharmaceuticals has been to allow blockbuster drugs to recover the huge outlays needed for their development, while providing generics the opportunity to expand affordable access. The system is not perfect, but it provides a balance between intermediate and long-term taxpayer savings that is fairer and more effective than price controls or other supply and demand management schemes.

Improving the American structure will take patient, thoughtful work—not shortcuts whose failed history holds so many dangers for taxpayers as well as patients. Efforts to promote such sensible schemes have been underway for many years, and with sufficient political support could now bear fruit. Just a few of the many examples NTU has offered include:

• Reforming government programs that encourage cost-shifting and discourage accountability. The 340B discount program, which has come under scrutiny for abuse by hospitals, along with government payments for unnecessary compounded medications, are two such areas.
• Continuing efforts to speed up federal drug approvals, especially generics, where the Administration has already made solid progress.
• Encouraging “value-based’ pricing, which pays for medications based on whether they work for a given individual rather than a pre-negotiated supply chain discount. This is the philosophy driving the recent merger behind insurer Cigna and pharmacy benefit manager Express Scripts.
• Instituting managerial cost-saving measures in federal programs, including expanded recovery auditing and smart card technology. A bipartisan measure to introduce the latter as a pilot program in Medicare has already passed the House, and awaits the nod from the Senate.

In an open letter about HHS’s proposal sponsored by National Taxpayers Union, more than 150 economists (including a Nobel Laureate) have warned that “Policymakers looking to reform drug pricing models should reject price controls and instead pursue alternative market-based approaches that would lower prices, expand access and encourage more innovation.”

Taxpayers and patients are hoping this Administration will heed such advice more fully than its predecessors.

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