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Perspective

Leave drug program alone

By Washington Post
Published November 5, 2006

One of the Democrats' election talking points is a promise to revamp the Medicare prescription drug benefit. They paint the 2003 legislation as a sellout to pharmaceutical firms: Rather than having Medicare officials use the government's bargaining power to keep drug prices down, the law left the job of negotiating prices to private insurers. The Medicare drug benefit has actually turned out to be cheaper than projected, and most beneficiaries say they are satisfied with it. But the House Democratic leader, Nancy Pelosi, nonetheless accuses Republicans of "putting pharmaceutical companies and HMOs first at the expense of America's seniors."

Could Medicare officials save money by negotiating directly with drug companies? In theory, yes: Once a drug has been invented, the cost of manufacturing pills is low, so a huge purchaser such as Medicare could demand large discounts and still find willing sellers. But lower prices might reduce drug companies' incentive to invest in research. Moreover, having the government set drug prices is a sure way of flooding the political system with yet more pharmaceutical lobbyists.

The best way to make the difficult trade-off between affordable drugs and incentives for new research is to heed signals from consumers. The existing Medicare drug benefit may ultimately generate such signals. Retirees have a choice of insurance plans. If they choose to pay top dollar for branded medicines, the incentives to invent new medicines will rise; if they prefer to save money, incentives for innovation will decline a bit. Either way, a balance will be struck that reflects broad social preferences.

It's fair to object that consumers may not be equipped to make smart decisions, but a switch to government purchasing of Medicare drugs would choke off this experiment before it had a chance to play out. For the moment, the Democrats would do better to invest their health-care energy elsewhere.

[Last modified November 5, 2006, 07:34:43]