Price Controls Are a Prescription for Disaster

The Clinton administration's new Medicare drug-benefit plan is one of many proposals to do something about pharmaceutical expenditures for the elderly. But before Congress passes anything like the Clinton plan, it should get a better fix on what is and is not a problem. It would be too easy, in an effort to cut costs, to constrict the pipeline that is producing one new wonder drug after another.

The Clinton proposal would cover half of a Medicare patient's first $2,000 in drug purchases starting in 2002, rising to half of the first $5,000 in 2008. Premiums would cover only half the cost of this plan, which is why the administration thinks almost all Medicare recipients would join. The administration also seems to think its plan will cover the bulk of Medicare drug spending; recent surveys show that 87% of drug spending by the elderly is for patients who consume less than $2,000 of pharmaceuticals a year.

A close look at the administration's numbers shows why its plan is dangerous. The program is projected to cost $228 billion for the 10 years beginning in 2002, or just under $23 billion a year on average. Because exactly half of that will be covered by premiums paid by Medicare recipients, the administration's estimated premiums tell us how fast officials expect expenditures to grow. Those premiums are predicted to start at $288 a year, increase to $528 by 2008 and rise at the rate of inflation thereafter. This works out to planned Medicare expenditures of about $15 billion in 2002, increasing thereafter at about 5% a year. This corresponds with total expected pharmaceutical expenditures by senior citizens of a bit more than $30 billion in 2002 (when the $2,000 limit is in effect), increasing thereafter by 5% a year.

If the Clinton plan becomes law, Medicare officials will do everything they can to make sure costs don't rise faster than this. But compare the projections with what is happening today. Prescription -drug expenditures for the elderly were about $30 billion in 1998, and are growing at an annual rate of roughly 15%, which works out to about $35 billion this year, perhaps $40 billion in 2000 and $45 billion in 2001. Whatever one thinks the number will be in 2002 and beyond, it is a lot more than the $30 billion plus 5% a year the administration foresees. So the administration plans to downsize elderly Americans' pharmaceutical budget. To do that, it will assign a single management firm to negotiate prices and specify drug choices for each geographical region of the country.

The very idea of specifying how much should be spent on pharmaceuticals in the next five or 10 years is dangerously wrongheaded. We are in the middle of a revolution in pharmaceutical research and development. Researchers can identify and test potential cures several times as quickly as just a few years ago. One might guess that this fast-moving innovation would make drugs cheaper, as it does with computers. And it does make drugs cheaper, all else being equal, but that misses the point.

What the revolution has done is open up entire new possibilities. Problems that had defied medical science for centuries are giving way to new treatments. Most of the recent increases in drug expenditures have been for new therapies, not higher prices. It would be foolish to pretend that anyone -- even the smartest White House analyst -- could predict how much of our money any of us will want to spend on pharmaceuticals years from now.

Consider just one disease: arthritis, a painful and debilitating condition that affects almost half of those over 65. The effort simply to find a good pain reliever has occupied considerable medical intelligence for more than a century. It was in 1897 in Germany that a Bayer chemist seeking relief for his arthritic father first isolated aspirin. But aspirin and most of its kin, the nonsteroidal anti-inflammatory drugs or NSAIDs, are hard on the stomach. As a result, some 15% of arthritis sufferers end up with stomach ulcers. The gastrointestinal effects of NSAIDs caused some 16,500 deaths among arthritis victims in 1997. And it's often impossible to know before treatment who will incur those side effects.

The pharmaceutical research revolution is changing all this. Aspirin and similar drugs treat arthritis pain by suppressing an enzyme called cyclo-oxygenase, or Cox for short. But Cox comes in two variants. Cox-1 suppresses the inflammation (and therefore the pain) of arthritis. Cox-2 suppresses another enzyme that protects the stomach. The solution was to develop a Cox-2 inhibitor that would let Cox-1 do its work. But as the Journal of the American Medical Association pointed out in November 1995, progress on that front was "still about five years away."

Three years and a month later, the first Cox-2 inhibitor, Celebrex, had traversed the onerous Food and Drug Administration approval requirements, including efficacy trials with more than 10,000 patients. Monsanto and Pfizer introduced Celebrex in January of this year. It matches aspirin in relieving pain, and physicians are persuaded that it is far safer -- hence the drug's nickname, "superaspirin." Those physicians have made Celebrex one of the most prescribed new drugs in history.

Celebrex is also expensive, with a month's supply running about $100, although that is comparable to the prices of the prescription NSAIDs it replaces. The mammoth sales of Celebrex testifies to its benefits in comparison to its cost. And -- an essential part of the story -- Celebrex already faces a competing Cox-2 inhibitor, Merck's Vioxx, with more on the

This story makes clear why the Clinton administration's idea of downsizing the pharmaceutical budget is dangerous. NSAID expenditures for arthritis had been stable because there had been little progress. Now that there is something worth spending more money on, this expense category is rapidly escalating. That is exactly what should be happening.

It's also notable that Celebrex provides value chiefly by reducing side effects. The next time you hear complaints about too many "me too" drugs, remember that they are usually filling niches in terms of better efficacy or fewer side effects. Arthritis is not the only illness whose treatments can kill the patient.

We should hope for more of the same. With an aging population, the battle against arthritis is just getting started. We need even better pain relievers, even fewer side effects and full-scale preventatives and cures. The same could be said of cancer, heart disease, diabetes, Alzheimer's and a raft of other illnesses. Those who suffer from these conditions should hope that Congress doesn't pass a law to control drug prices or limit pharmaceutical budgets for the elderly. If Congress had enacted such a law five or 10 years ago, there might been no Celebrex, and if such a law is passed now, there will be no . . . well, we don't know what the blockbuster of 2003 or 2006 would be.

And let's not forget the real bottom line. Pharmaceuticals aren't for managed-care administrators or government functionaries. What really counts is whether they are worth their cost to patients. People today expect to have a better and more active old age than their parents and grandparents did. There is little doubt that they are willing to save money to pay for whatever lifesaving and life-enhancing drugs emerge from the next generation of pharmaceutical research. No government agency should try to stop them.

Mr. Calfee is a resident scholar at the American Enterprise Institute. A related editorial appears nearby.

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About the Author


John E.
  • Economist John E. Calfee (1941-2011) studied the pharmaceutical industry and the Food and Drug Administration (FDA), along with the economics of tobacco, tort liability, and patents. He previously worked at the Federal Trade Commission's Bureau of Economics. He had also taught marketing and consumer behavior at the business schools of the University of Maryland at College Park and Boston University. While Mr. Calfee's writings are mostly on pharmaceutical markets and FDA regulation, his academic articles and opinion pieces covered a variety of topics, from patent law and tort liability to advertising and consumer information. His books include Prices, Markets, and the Pharmaceutical Revolution (AEI Press, 2000) and Biotechnology and the Patent System (AEI Press, 2007). Mr. Calfee wrote regularly for AEI's Health Policy Outlook series. He testified before Congress and federal agencies on various topics, including alcohol advertising; biodefense vaccine research; international drug prices; and FDA oversight of drug safety.

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