The Truth About Non-Interference

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  • 11/26/2005

Here is Ben Zycher’s important new article on Federal non-interference, courtesy of the 11/22 edition of The Hill.

To preserve supply and innovation, don’t let feds negotiate drug prices
By Benjamin Zycher

With growing political pressures to find savings in the budget, many now argue that the federal government ought to negotiate the prices to be paid for prescription drugs under the Medicare Modernization Act (MMA), claiming that the law as now written prevents such negotiation.

And there is no doubt about the likely effects on price discounts: Unlike, say, lowly Wal-Mart, the federal government is really, really big, a reality made obvious by the federal purchasing program for childhood vaccines and by the pharmaceutical price “negotiations” — price controls — conducted by the Department of Veterans Affairs.

So substantial price savings undoubtedly are there to be had. What are we waiting for?

Well. Let us first clear up one important bit of misinformation widespread in the public discussion. The MMA does not prevent price negotiations on drugs; discounts are arranged in negotiations between the pharmaceutical firms and the pharmacy benefit managers (PBMs), that is, Wal-Mart, the pharmacy chains, the insurance companies, the healthcare delivery organizations and the like. The MMA prevents the feds from “interfering” in those negotiations by, say, mandating minimum discounts or formulary restrictions or other such constraints.

But if the feds are able to obtain discounts bigger than those yielded through negotiations between the drug producers and the PBMs, why not have the Beltway do the negotiating?

In order to answer that question, we must ask what our policy goals are. We want to help those less fortunate obtain needed medicines at prices that they can afford. Were that the only goal, the appropriate course for the feds would be: Negotiate as hard as possible.

But we have three other goals. First, we want those needed medicines to be available to patients in the respective formularies.

Since the PBMs must compete for customers, they have incentives to balance the objective of low prices with the countervailing objective of formulary availability. If a given PBM demanded too steep a discount, the drug producer would refuse to sell, and patients would have to do with other drugs in the given pharmaceutical class, with less effectiveness, more adverse side effects or both. And so competitive market forces would perform their usual function of establishing appropriate trade-offs.

The federal government, on the other hand, does not have “customers.” It has interest groups, the demands and preferences of which are satisfied in greater and lesser degrees; and it has voters, the happiness of whom is registered not in dollars spent every day, but instead in votes delivered every two or four or six years.

With powerful incentives to reduce budget costs, and the very great unlikelihood that patients will move to France if given drugs drop out of a government Medicare formulary, federal incentives to satisfy the pharmaceutical preferences of patients are weak. In no other context does the admonition “Write your congressman” fall quite so flat.

Second, we want to preserve efficient incentives for the research and development that yields new and improved medicines, and reduced human suffering, over the long term.

The incentives of federal decisionmakers to put the squeeze on suppliers mean that the long-run supply problems created by federal negotiation will be left to future officials to confront, just as in the ongoing case of the vaccine market, with respect to which substantial budget costs now will have to be borne as a means of compensating for the adverse effects of past “negotiations.” The losers will be those in the future who will suffer more than otherwise would have been the case, and for the most part they will not know who they are because they will not know about the drugs that will have failed to have developed. And in any event, many of them do not vote today. So much for the children.

Finally, we want — or we ought to want — to preserve property rights and the constitutional protections against both takings and the efforts of political majorities to impose losses upon unpopular groups.

Modern medicines are substantially the product of huge investments in intellectual property, and coercive “negotiations” yielding confiscatory prices represent a taking — in every relevant sense of that term — of much of the value of that intellectual property. And make no mistake about it: It is the protection of property rights that is the foundation of a free-market economy and the long-term alleviation of human misery. Therefore, it is not merely pharmaceutical producers to whom federal price negotiations over drugs represent a looming threat. They are a fundamental danger to all.


Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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