Lobbyists and politicians often try to obscure issues when they advocate positions favored only by relatively small special interest groups. They did their job well in helping to frame a Washington Post piece on the Medicare drug benefit. The article discusses the possibility of having Medicare negotiate drug prices directly with the industry, a position strongly opposed by the Washington Post editorial board. One would be hard-pressed to figure out what is at issue after reading this piece. For example, the article raises the possibility that if Medicare negotiated prices directly with the industry, it �could drive prices higher.� Yes, this must be why the industry is lobbying so hard against having Medicare negotiate prices. They are worried that it would cause them to charge higher prices and get higher profits. The article then raises the other potential downside of negotiated drug prices �it could significantly lower drug-company profits and discourage medical innovation.� Okay, let�s check reality here. Absolutely every person I know who supports having Medicare negotiate prices with the drug industry believes and hopes that such negotiation will lower industry profits. This is not a negative side effect of the policy � it is the point. Will lower profits reduce innovation? Well, let�s postulate that it will have a non-zero effect. But, lower prices may also mean less marketing (the industry spending approximately as much on marketing as it does on research). It might also mean less copycat research (according to industry�s own analysis, approximately two-thirds of its research spending goes to developing copycat drugs). And, it might mean that the annual compensation of the top execs in the pharmaceutical industry falls back into the low millions. The serious question is not whether research spending will be reduced; the question any serious person would ask is by how much. If the country saved $40 billion a year on drug prices and the industry therefore cut spending into innovation drugs by $100 million would this be a bad deal? Perhaps it would be at the Washington Post, but not in the real world. The article also gets one very important thing wrong. It claims that patients of the Veterans Administration can only get drugs on the VA formulary. This is not true; they only get very large discounts on the formulary drugs. If their doctors specifically prescribe a drug not on the formulary, then they can get this drug, they just have to pay a price comparable to what they are charged now under the Medicare prescription drug plan. The facts on this one are simple; the industry can profitably sell drugs to Medicare at the same prices that it sells to the Veterans Administration, Canada, or every other rich country in the world. The industry makes money on all these transactions or they would not make them. Will the industry lie, cheat, and buy politicians to try to avoid lowering their prices in the huge U.S. market? Of course, welcome to the real world. Are there downsides from these sorts of price cuts � yes and these should be discussed. But we can�t have a serious discussion until the real facts are on the table.
-- Dean Baker
