Promises to the Drug Industry: Like Renegotiating NAFTA?

August 07, 2009

Dean Baker
Talking Points Memo, August 7, 2009

See article on original website

Apparently the Obama administration made a commitment to the drug companies that it would block efforts to reduce drug costs in the Medicare prescription drug program. This was apparently in exchange for a promise by Pharma to cut their prices to seniors by $80 billion over the next decade. While we may not know the full content of whatever agreement was actually struck, if this exchange is at its center, the taxpayers got a bad deal.

To give some context, the country is projected to spend more than $3.5 trillion on prescription drugs over the next decade. This is more than 2 percent of projected GDP over this period and comes to about $12,000 per family. That is real money even in the context of federal budgets.

The industry’s promised $80 billion in savings would be equal to less than 3 percent of its projected revenue. It is also important to remember that these savings are not well-defined and there is no obvious enforcement mechanism. Given the record of the drug industry, a certain amount of skepticism would certainly be warranted.

Even if the industry carries through with its promise, they would still be getting a very good deal. The United States pays nearly twice as much for its prescription drugs as do people in other countries–or for that matter – as do our veterans who receive their health care through the Veterans Administration (VA). If Medicare were to pay VA type prices, it could easily save taxpayers and beneficiaries $600-$800 billion over the next decade.

There is a great deal of support among Democrats in Congress for having Medicare negotiate lower prices with the drug industry. The industry scored a real coup if it was able to head off this possibility with a vague promise of $80 billion in savings.

It is important to realize that high drug prices don’t just cost us money, they are also likely to lead to bad medicine. The basic story is that drugs are almost invariably cheap to produce; the reason that prices are high is that the government grants the industry a patent monopoly. This monopoly allows Pfizer, Merck, and the rest to charge hundreds or even thousands of dollars for a prescription of life-saving drugs that would sell for $4 at Wal-Mart if we had a free market.

When there are huge gaps like this between price and cost of production, then the industry has enormous incentive to promote their drugs, even when they may not be the best medicine for patients. This is why it spends billions of dollars each year on ridiculous television ads and why it spends tens of billions of dollars hiring former cheerleaders to go to doctors’ offices to push their drugs.

Business responds to incentives, that’s basic economics. And the incentives the government is giving the drug companies is to push their drugs to anyone they can get to buy them, whether or not the best medicine for their condition. Needless to say, this goes directly against President Obama’s efforts to contain costs by promoting good medicine.

If we had drug prices more in line with production costs, we would take away the industry’s incentive to lie in ways that are bad for our health. In short, we would get better medicine and pay less money for it. (Yes, we would have to find alternatives to patents for financing drug research, but there are better ways.)

Of course there is an alternative spin that we can put on the deal with the pharmaceutical industry. Politicians often have to make commitments to gain support in the middle of heated campaigns. Remember how all the leading Democratic presidential candidates promised to renegotiate NAFTA during the primaries? We haven’t heard a lot about that one lately.

Perhaps the pledge to block lower Medicare drug prices is like the commitment to renegotiate NAFTA. We better hope so.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.

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