Holding Down Drug Prices

Now that Congress has passed a costly prescription drug benefit for older Americans — a bill that we endorsed to close a glaring gap in Medicare — it is imperative to find strong tools for restraining drug costs. The drug benefit is projected to cost $400 billion over the first 10 years and perhaps $1.5 trillion or more over the following decade. Without cost restraint, it will impose huge financial burdens on future generations.

At Republican insistence, the drug benefit was designed to avoid any possibility of the federal government using its bulk-purchasing power to demand low prices. That sets drugs apart from the rest of the Medicare program, which routinely dictates low prices for reimbursing hospitals and doctors for the services they provide. The drug program will rely instead on private pharmacy benefit managers to negotiate good prices. Those companies will have more bargaining clout than an individual elderly person but far less than the federal government. Unfortunately, their loyalties are suspect. Some big pharmacy benefit companies have been accused of taking rebates from manufacturers to promote their most expensive drugs over cheaper alternatives.

We can think of two additional approaches to reducing costs that should have wide appeal. The first is to alter the drug industry’s global pricing patterns. Drug companies now charge what the market will bear in this country and sell at lower, government-dictated prices in other industrialized nations, effectively forcing American consumers to pay for research that benefits the rest of the affluent world. The Bush administration needs to instruct the United States trade representative to press for a fairer pricing system, or else Congress should take up again the notion of allowing reimportation of low-cost drugs, not just from Canada but from Western Europe as well.

Another appealing approach would have the federal government finance research comparing the effectiveness of competing brand-name drugs, thus providing data on which drugs work best and are presumably worth more. The bill just passed provides a modest $50 million to get trials started, but the effort needs to be more ambitious. Ideally, the Food and Drug Administration should also be empowered to demand that new drug candidates be compared directly against existing drugs, not simply against a placebo. If market forces are to be the main mechanism for restraining prices, the market needs a lot more information than it is now getting.

Beyond that, it will be important to accelerate several current trends. State governments should use their buying power to get good deals for their employees and Medicaid patients. All purchasers of drugs should use formularies or tiered pricing to encourage the use of cheaper drugs. The federal government should press for greater use of low-cost generic drugs and, where it is safe to do so, move more brand-name drugs from prescription status to over-the-counter status, almost surely reducing their cost.

But even after all feasible price restraints are imposed, Congress will still have an obligation to ensure adequate financing of the drug benefit. Every member of Congress who voted for the Bush administration’s reckless tax cuts ought to shrink from extending them when they expire, freeing up plenty of money to pay for drugs. Our guess is that most Americans, if forced to choose, would prefer medicine over a modest tax benefit.