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Commentary

License to Ill
Benjamin Zycher, Ph.D., National Review Online, 1-11-07

Dr. Benjamin Zycher, a senior fellow at the Manhattan Institute, explains why federal price negotiations over drugs will inevitably shortchange patient choice and health.

Current law excludes the feds from drug-price negotiations, leaving that role instead to the private-sector companies (pharmacy-benefit managers) that manage drug plans on behalf of their enrolled patients. This system is roughly efficient—no small achievement in the Beltway—in that the private companies must balance their customers' demands for both lower prices and access to a broad array of drugs, while the pharmaceutical producers seek prices sufficient to recover their average $1 billion investment in each new drug while preserving the markets for their products.

The federal government, on the other hand, does not have "customers." Instead, it has interest groups engaged in a tug-of-war over shares of the federal budget.

Accordingly, if the feds were to take over price negotiations, political incentives to achieve budget savings by driving prices down would be powerful. At the same time incentives to satisfy patient preferences for broader access to drugs would be weakened, as the dissatisfaction of patients would be offset by the support of other constituencies enjoying increases in their favored programs.

… Federal price negotiations will cause sharp price reductions, but this will yield less research and development investment in new and improved medicines over time. Recent economic analysis published by the Manhattan Institute yields projections that the effect would be a reduction of about ten new drugs per year on average, causing a loss of about five million life-years each year, valued conservatively at $500 billion annually, a sum far in excess of total U.S. spending on pharmaceuticals.

It is no mere cliché that life and liberty are always at risk while Congress is in session, and Congress in haste makes the most waste of all. The proposal for drug-price negotiations is an example of a sweeping government measure that ostensibly aims to improve public health and well-being, but will actually result in the redistribution of huge amounts of wealth from the private sector to various constituencies, without the stigma of a "tax increase." And all that in the first hundred hours.



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