FDA's drug policy bad for our health
David G. Tuerck
A question worth pondering over your morning coffee: If the federal
Food and Drug Administration is supposed to protect us from unsafe
drugs, who is supposed to protect us from unsafe drug policies?
All across the country, a dangerous game
is being played with your health. State lawmakers from Maine to
California are concocting complex tax and price-control schemes
and bottling them as solutions to the current prescription drug
Like Dr. Feelgood peddling his wares, they say, "Swallow this
and drugs will become more affordable. Swallow this and we'll have
more money to spend." And if you
ask about the side effects they'll look at you and say with a wink,
"C'mon, everybody's doing it."
The exact design and scope of these schemes
vary from state to state, but most are based on the federal Medicaid
Drug Rebate Program. Under this program, enacted in 1990, drug companies
pay a tax to have their products included in the Medicaid drug formulary
so they can be prescribed by a physician without prior approval
from the state Medicaid agency.
This tax (called a "rebate" in
Medicaid-ese) is calculated as a percentage of a drug's average
manufacturer's price. The tax effectively lowers the price a state
pays for brand-name drugs to 15.1 percent below the AMP or to the
lowest price paid by any private purchaser in the United States,
whichever is lower. The goal was to reduce the price of prescription
drugs paid by state Medicaid programs. But the result has been the
opposite. The proliferating taxes and price controls are actually
making drugs both less affordable and less accessible to the residents
of states imposing them.
Drug companies routinely grant discounts
to large purchasers (for example, HMOs), and in many cases those
discounts are greater than the Medicaid program. The law prohibits
a drug company from charging Medicaid a price higher than what it
charges another buyer. But in doing so, it also reduces incentives
to cut prices or to offer discounts to other buyers.
Indeed, both the General Accounting Office
and the Congressional Budget Office concluded that one of the effects
of the Medicaid rebate scheme was to dramatically reduce the discounts
offered to other buyers.
As a result, people who have prescription
drug coverage through an HMO or another group purchaser could have
expected prices to go up as a direct result of this program. And
that's just what happened. After the law was enacted, prices increased,
particularly for drugs for which Medicaid was a large purchaser
and those with competition from generics.
Not only does the law raise prices, it also
reduces patients' access to the drugs they need. If the manufacturer
refuses to go along with the rebate scheme, the state requires doctors
wishing to prescribe a drug offered by that manufacturer to seek
"prior authorization" before doing so. This is intended
to pressure the manufacturer into offering the rebate, but the effect
is to limit patients' access to needed drugs.
Now several states - Massachusetts, Maine,
Vermont, Florida, Colorado and New Jersey among them - are experimenting
with expanding the basic Medicaid rebate model to other populations,
in some cases to all the residents of the state. To sweeten the
pot, proponents of these expansions want to use prescription drug
tax revenues to fund new public programs - with their attendant
bureaucracy - to help people without other coverage pay for their
One Massachusetts bill would mandate a 40
percent reduction in outpatient prices for drugs sold anywhere in
the state. A drug company that refused to cooperate would be barred
from selling in the state.
Proponents of these measures understand how
dangerous a game they are playing. They know state taxes and price
controls make drugs more expensive and threaten availability. They
also know their efforts could end up reducing the incentive of the
drug companies to develop and market new drugs. But when queried
about these concerns, they typically shrug their shoulders and say,
in effect, "Don't worry, we have everything under control."
This, however, is snake oil. Are we really
supposed to believe that the same state government that can't come
close to forecasting tax revenues one year out could control an
industry that must make decisions affecting years, even decades,
of product development? Don't bet your life on it.
David G. Tuerck is executive
director of the Beacon Hill Institute and chairman and professor
of economics and at Suffolk University.
This article appeared in the Boston
Sunday Herald on May 5, 2002.
Format revised on August 18, 2004