President Clinton’s proposed drug benefit for Medicare recipients is predicated on driving down the cost of drugs that elderly Americans need. Such a reduction would short-circuit the cycle that is generating dramatic advances in drug research and development.

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, and indeed, recent surveys show that 87 percent of drug spending on the elderly is for persons consuming less than $2,000 of pharmaceuticals per 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 ten years beginning in 2002, or just under $23 billion per 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 projected to start at $288 per year, increase to $528 by 2008, and rise at the rate of inflation thereafter. That works out to planned Medicare expenditures of about $15 billion in 2002, which will then increase at about 5–5.5 percent a year (including inflation and taking into account lifting the cap to $5,000). Because premiums would cover half of what Medicare patients actually pay, that projection reflects total pharmaceutical expenditures for senior citizens of a bit more than $30 billion in year 2002 (when the $2,000 limit is in effect), increasing thereafter by 5 percent 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 a year in 1998 and are growing at an annual rate of roughly 15 percent, 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 percent a year the administration foresees for 2002 and after. So the administration plans to downsize the elderly’s 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.

Perhaps that would make sense if a furniture budget or even a transportation budget were at stake. But trying to shrink the elderly’s prescription drug budget—as if it had simply gotten too large, too fast—is exactly the wrong way to think about pharmaceuticals. The very idea of specifying how much should be spent on drugs in the next five or ten years is dangerously misconceived. We are in the middle of a revolution in pharmaceutical research and development. Researchers can identify and test potential cures at several times the speed of just a few years ago. One might guess that this rapid innovation would make drugs cheaper, as it does for computers and camcorders. In fact, 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 decades or centuries are giving way to new treatments. That is why most of the recent increases in drug expenditures have been to pay for new therapies, not to cover higher prices. So there is no reason to think the pharmaceutical research revolution should lead to spending less money for drugs. Increases are far more likely, because treatment opportunities will continue to expand exponentially—just as cheaper computer-processing power increased the market for computers far beyond what anyone could have imagined when the microprocessor arrived in the 1970s. It would be foolish to pretend that anyone—even the smartest White House analyst—can predict how much of our money any of us will want to spend on pharmaceuticals once we learn of the new products and applications that will emerge in the coming half dozen years.

Consider the example of arthritis. Arthritis is a painful and debilitating condition that affects almost half of those over sixty-five and costs the nation well over $100 billion annually, about half of that for health care expenditures. The effort merely 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 so it could be marketed. But aspirin and most of its kin, the nonsteroidal anti-inflammatory drugs, or NSAIDs, are hard on the stomach—so hard, in fact, that some 15 percent of arthritis victims develop stomach ulcers. A large proportion of arthritis sufferers fear aspirin even more than they fear the pain and disabilities of arthritis. Their fears are well founded. The gastrointestinal effects of NSAIDs caused some 16,500 deaths among arthritis victims in 1997. To make matters worse, it is often impossible to know before treatment who will incur those side effects.

The pharmaceutical research revolution is changing all this. To state some complicated biology in simple terms, it turns out that 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 approval requirements of the Food and Drug Administration, including efficacy trials with more than 10,000 patients. Celebrex entered the marketplace 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 testify to its benefits in relation to its cost. And—an essential part of the story—Celebrex already faces a competing Cox-2 inhibitor, Vioxx, with more on the way.

The Celebrex story shows why the Clinton administration’s goal of downsizing the pharmaceutical budget is dangerous and why that budget should get bigger, not smaller. NSAID expenditures for arthritis had been stable because there had been little progress in developing better medications for the disease. Now that there is something worth spending more money on, this drug-expense category is rapidly escalating. That is exactly what should be happening, and 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, with fewer side effects, and full-scale preventatives and cures—as we need new drugs for cancer, heart disease, diabetes, Alzheimer’s, and a raft of other illnesses.

It is also notable that Celebrex provides value by reducing side effects. But arthritis is not the only illness whose treatments can cause suffering or even kill the patient. 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. Thus the 1998 award from the Pharmaceutical Research and Manufacturers of America for social benefits from pharmaceutical research went to two anti-emetic drugs, which are used to treat the side effects of chemotherapy for cancer. Sometimes curtailing side effects is what makes cures possible. And sometimes, as was apparently the case with arthritis, the cost of treating side effects is more than the cost of treating the original illness.

Another side of the Celebrex story should not be overlooked. It concerns the role of patents. For decades, the pharmaceutical industry has fought regulators, Congress, and politicians over the proper length of patents for products that require many years of research and regulatory review before marketing. Now the accelerated rate of pharmaceutical research and development threatens to reduce patent life to a second-order consideration—still crucial, to be sure, and not to be weakened in any case, but no longer a guarantor of protection from vigorous competition. One of the least-appreciated effects of faster research and development is to quicken the competitive process itself. As always, the chief beneficiaries are consumers, or in this case, patients.

Perhaps the most important lesson is the illustration of how pharmaceutical prices work. The expectation of a handsome payoff is what drove the development of Celebrex in the first place. Relieving the pain and suffering of 37 million arthritis victims, while preventing thousands of deaths, is a target worth shooting at. No wonder the competition is so intense. The new marketing battle for the favor of arthritis sufferers is cause for celebration. But those with arthritis should hope that no one passes a law to control drug prices or limit pharmaceutical budgets for the elderly. If Congress had enacted such a law five or ten years ago, there might have been no Celebrex. And if such a law is passed now, there will be no . . . well, we don’t know what the blockbuster drug of 2003 or 2006 will be.

And let’s not forget the real bottom line. With so much talk about the prices of drugs and the premium costs of managed care, it is easy to forget that pharmaceuticals are for patients, not for managed-care administrators or government functionaries. Some drugs save health care monies, of course, but not all do that. What really counts is whether new drugs are worth their cost to patients. In this new era of drug research, some of the most valuable new products do not have a lot to do with acute medical care, which is what health care organizations deal with. The statin cholesterol-lowering drugs, for example, are often taken by people with no immediate medical problems at all, and they provide most of their benefits years down the road. Anti-obesity medications promise immense benefits to people who, again, may not need traditional medical treatment for years. The people contemplating old age today want to have a better and more active old age than their parents and grandparents had. There is little doubt that they are willing to save money to pay for whatever life-saving and life-enhancing drugs emerge from the next generation of pharmaceutical research. No government agency should get in the way of that.

John E. Calfee is a resident scholar at AEI.