Court Decision Will Harm Health Consumers
The recent U.S. Supreme Court decision in favor of the State of Maine’s plan for a prescription drug plan for low income and uninsured residents allows this flawed program to go forward, at least temporarily. The idea of the State negotiating discounts for this group is appealing on the surface but is likely to be counteractive for several reasons.
First, the “negotiating” of drug prices by the State and manufacturers will almost certainly be determined by government fiat. Maine will supposedly determine if prices are “reasonable” by comparing them to the “lowest” prices available in the State. If the prices offered by manufacturers are considered “too high” the State will impose price controls on these drugs.
Government-run health programs such as Medicare and Medicaid cannot determine what a fair price is for any health product or service, including drugs. If prices are set too low the best-case scenario is that incentives for the development of new drugs will disappear and the number of these miracle products available to consumers will slow to a trickle.
It now costs over $800 million dollars and takes over 12 years to bring a new drug to the marketplace, up from around $350 million ten years ago. Given a politician’s desire to provide “cheap” drugs to their constituents it is quite reasonable that the prices paid by consumers under this scheme will be below any firm’s production costs in the long run. The result will be a paucity of new products.
It is also possible that this bureaucratic intrusion in the market will set prices below the marginal short-run cost of production. If this occurs there will be shortages of some drugs. The possible effects of shortages run from higher long run prices to worse health outcomes.
For example, consumers might respond to shortages by choosing an alternative treatment such as surgery. This probably will result in higher overall health care spending (since drugs are usually cheaper than surgery) and possibly worse health care outcomes.
The solution to the problem of affordable drugs is the same one that needs to be applied to health care in general. Through low-deductible private health insurance plans and Medicare and Medicaid, the vast majority of health consumers in the U.S. do not know the actual cost of the medical services they buy. Further, government-set reimbursements heavily influence the pricing of these services to the government and to private insurers.
Establishing a health care marketplace will help solve this problem. Medicare and Medicaid should be reformed so that government merely provides the funding for health care, but individuals make the decisions regarding the most effective health care treatment for them through Medical Savings Account Plans. Only if patients are given the incentives to choose appropriate care given their situations will we achieve savings without severely compromising outcomes.
Michael T. Bond, Ph.D., is Director of the Center for Health Care Policy at The Buckeye Institute and a professor in the Department of Finance at Cleveland State University.
