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86 IRET Congressional Advisory 1 (1999)

handle is hein.taxfoundation/iretcgadv0083 and id is 1 raw text is: IRET Adv...isory July 23, 1999 No. 86 WHY MEDICARE DRUG COVERAGE WOULD HURT SENIORS Despite Medicare's already horrendous finances, the Clinton Administration seeks to expand the government entitlement program by creating Medicare Part D to provide an outpatient drug benefit for senior citizens. This proposal is reminiscent of the Administration's failed attempt in 1993 and 1994 to take over all health care financing in the United States. A key element in the earlier plan was government oversight of the pharmaceutical market, with the government intending to cut costs by squeezing drug prices. One of th earlier plan wa concern that control would e reasons the s rejected was government hurt the quality Fewer New Drugs Developing, testing, and bringing to market a new drug is an extraordinarily expensive process - usually several hundred million dollars - due in part to government regulatory requirements. Further, the process is very risky; there are many failures for every success. Hence, when a new drug proves safe and effective, it may cost only a few cents to produce, but it must be priced much higher than its marginal cost of production in order to recover both its own massive development costs and the costs of the many efforts that failed. Unless pharmaceutical companies expect to recover those costs, they will stop searching for new drugs. Moreover, because investors prefer safety to risk, other things Despite Medicare 's already horrendous finances, the Clinton Administration seeks to expand the government entitlement pro- gram by creating.. an outpatient drug benefit for senior citizens... The predictable result .. would be fiar fewer newv drugs to increase life expectancies, to improvle the quality o f life, and to substitute for more invasive or costly procedures. of health care, especially for people with critical problems. Obviously, the current proposal is more modest, but it would still cause great damage. Tampering with the pharmaceutical market is not just bad economics. It would jeopardize the extremely expensive but hugely beneficial efforts of pharmaceutical companies to develop new, life- saving medicines. People would die. Institute for Research on the Economics of Taxation equal, they demand higher expected returns before putting their money in risky investments. Thus, companies engaged in the chancy business of searching for new drugs must aim for larger profits than companies in most industries. If the government should attempt to regulate drug companies so that they are not allowed to earn profits exceeding the average in the economy, the companies would respond by cutting their research efforts. After all, concentrating on producing established drugs and limiting most research to making minor improvements in proven drugs entails much less risk than searching for new drugs. The government already is a major drug purchaser in the United States. By making the government an even larger purchaser, the Administration's plan would increase both the government's inclination to control drug prices and the harm it would cause by doing so. The IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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