Arnold Kling  

Predicting Drug Price Controls

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Jonathan Oberlander and Jim Jaffe think that drug price controls are on the horizon. They say that this is what happened to payments to physicians and hospitals under Medicare.


The government has habitually responded to budget stresses by changing the reimbursement mechanism and lowering payments. Whatever one thinks of government efficiency, this practice has worked well. Over the past two decades, physician and hospital payments have been regularly cut.

I think that a lot will depend on the extent to which prescription drugs are substitutes or complements for other medical treatments. If prescription drugs are substitutes, then adding prescription drug coverage could lower Medicare costs, which would reduce budget pressures.

For Discussion. How likely is it in practice that the prescription drug benefit will cause substitution away from higher-cost treatments rather than an overall increase in the demand for Medicare services?


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CATEGORIES: Price Controls



COMMENTS (6 to date)
I flunked economics writes:

I wonder how gov't controlled drug prices will affect research into new drugs. Will we see massive subsidies going to pharma corps to encourage research? After all, it seems the lion's share of new drugs come out of the USA and parasitic state healthcare programs in other countries just rely on the USA to provide most of their drug research. Take away the drug companies motivation for making new drugs and we might find ourselves all up the proverbial river. Then again maybe the high cost and risk of developing new drugs is just pharma corp propaganda.

Boonton writes:

So let's be clear here; 'price controls' means government refusing to spend the number of taxpayers dollars that the drug companies want it to spend?

We need subsidies to restore the 'motivation' that has been robbed from drug companies by gov't not issuing a blank check?

If the gov't sets a price for drugs that is too low, drug companies can simply sell the drugs at the price they desire and those on Medicare will have to make up the difference or do without.

Boonton writes:

Regarding the issue of substitution:

It shoulds like a perfect time to inflict my own healthcare voucher idea on the masses again. Here it is:

1. Some broad based tax is dedicated to universal coverage (sales tax, special income tax, whatever you want).

2. The revenue is divided equally into vouchers. The vouchers can:

a. Be used to buy health insurance.
b. Be used to buy healthcare directly.
c. Be donated to charity.
d. Be cashed in against employer provided health insurance.

3. In order to accept vouchers, insurers would have to agree to treat all patients equally with some variation in premiums permitted for age, smoking, etc. Pre-existing conditions, though, would have to be covered.

4. Those who don't use their voucher would be auctioned off to the insurance companies to be covered under some type of 'default policy' which would cover them if they got sick and couldn't pay from their own resources.

Advantages of this system:

1. Society gets universal coverage but does not create an entitlement. The voucher is linked to the tax that supports it. If people want better coverage they have to accept higher taxes, if they want lower taxes they must accept lower vouchers.

2. The market would find optimal subsitutions for medical procedures versus new drugs. Eric here likes to deride HMO's, yet they can still achieve cost savings. For example, it's almost certainly cheaper to lower heart attacks by getting people to be a bit more healthy (diet exercise) than to spend billions developing drugs just to accomodate a Big Mac a-day habit. This system could put such savings into practice by offering lower premiums to those who adopt the cheaper solution.

3. The disruption to the current system is minimal yet individuals have a property interest in seeing that they get the best deal possible on healthcare. At the same time, the advantage of buying insurance in groups (which is why many people like employer provided insurance) is preserved.

Fred Boness writes:

We are short of flu vaccine this year. There are only two companies left making vaccines. There are price controls on vaccines.

Boonton writes:

What price controls are you talking about? Last year there was too much flu vaccine and the literature I've read pins the problem not on price controls but on the fact that it takes 4-6 months to make the vaccine so there is no way to bring in more supplies if the manufactures find they underestimated demand.

Lawrance George Lux writes:

Study of the Proscription law will enlighten:
1) Medicare receiptients cannot get supplemental Drug proscription issurance.
2) Medicare administration cannot negotiate and buy in bulk.
3) Drug companies complain that foreign Drug Wholesalers buy at discount pricing for their drugs, then resell to individual Americans. This process is being stopped by Government action.

Drug companies have never claimed they were 'Dumping below Cost' the drugs they sell to foreign Wholesalers. The new restriction against American importation of drugs from these discount Wholesalers, simply states the Drug companies are legally entitled to maintain Monopoly pricing in the American market. It, combined with provisions of the Proscription Benefit law, insist American patients actually have less ability to pay for Drugs, than previous to the law.

I predict actual Drug sales in this Country will decline by anywhere from 8-40%. This lack of Drug use will translate into higher Emerency Room and Hospital costs. lgl

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