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MarketWatch: Doughnut Holes And Price Controls
There is a gap in the recently passed Medicare Modernization act - the so called "doughnut hole." When Medicare drug coverage takes effect in 2006, Medicare beneficiaries will pay $35 a month for prescription drug coverage, with Medicare covering 75 percent of all prescription drug prices up to $2,250. The patient will pay out-of-pocket all expenses after that up to $5,100 (this is the "doughnut hole"). Medicare will pick up 95 percent of all expenses above $5100. This article argues that Canada, the United Kingdom, and France (all of which enforce price controls on prescription drugs) pay an average of 34-59 percent less for prescription drugs, and that Congress could expect similar savings if it followed the international model. The authors argue that if the U.S. government was to enforce similar controls through Medicare drug coverage it could elminate the "doughnut hole" without exceeding current spending estimates. The authors acknowledge, however, that "any attempt to control U.S. prices, given the large percentage of international consumption, may affect investment in the industry and consequently pharmaceutical innovation."
The authors' stark choice, however, assumes that there is no way to improve the current drug development process that would lower prices and spur innovation, an odd oversight given that the authors observe that "of every 5,000 medicines tested, only five on average are tested in clinical trials, and only one is approved for patient use." Worse yet, only 3 of ten drugs reaching market manage to exceed R&D costs, meaning that a few truly successful drugs must recoup an enormous portfolio of wasted investments. Even a small improvement in that ratio could lead to significant market price reductions.
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