Unbiased Analysis of Today's Healthcare Issues

Manhattan Institute

Written By: Jason Shafrin - Jan• 18•07

The Manhattan Institute’s Center for Medical Progress has some interesting articles on health care policy.  The Center “…is dedicated to articulating the importance of medical progress and the connection between free-market institutions…”

One paper of note is by Vernon, Santerre and Giaccotto (“Are Drug Price Controls good for your Health“).  The authors examine the Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003 and the possibility that the bill could be extended to allow Medicare to negotiate price decrease directly with the pharmaceutical firms.  The authors astutely observe that federal government negotiation with pharmaceutical firms will create a near monopsony.  This will reduce price charged to consumers initially, but at the cost of a reduction in new drug innovation in the future.  To quote from the executive summary:

“…the MMA will dramatically reduce both real drug prices and R&D spending. We estimate that real drug prices will decline by 67.5 percent (or about 49 percent lower than pre-MMA levels) if purchases under the MMA are treated in the same manner as drug purchases under Medicaid and the VA have been treated historically. We further estimate that this decline will reduce R&D spending by 39.4 percent, or $372 billion over the lifetime of the act. This translates into a reduction of 277 million life years. “

Price controls may save money in the short run, but at significant cost in the long run.

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  1. Morris Berg says:

    As I do not have the time to comment on each of the analytical “leaps” that must be made to reach the authors’ rather broad conclusion (price control = NOT “good for your health” or 277 million life years), I would rather pose a simple but serious hypothetical:

    Suppose a non-monopsonic, consumer-driven mechanism were developed (e.g. independent drug-to-drug efficacy trials plus increased public scrutiny of the medical profession) that produced just half of the relatve price reduction over the same period of time due to increased market efficiency such that drugs with no or little additional therapeutic value [over existing treatments/drugs] become priced by the market accordingly.

    Would this price “correction” also not be “good for your health” despite the fact that it would reflect a more rational allocation of resources as defined by the market (rather than the government)?

  2. james gaulte says:

    Is not the general “rule” that price controls lead to increased demand,decreased supply,poor quality and black markets? Does the existense of a monopsony change those tendencies? Vernon et al estimate that “only” 60 % of the drug market will be controlled by the federal government, would not drug companies not try and compensate by higher prices to those not under the govt. plans much as the non-insured are charged more by hospitals for services? Would not the private health insurers use the government set prices to set their own prices in their negotiations with drug companies as they use DRGs and RBRV in their dealings with hospitals and physicians?