Price Controls Wrong Rx for Better Health at Lower Cost

By Kelly McCutchen

Prescription drug costs represent 11 percent of total U.S. health care spending, according to the most recent federal data. This relatively small portion of our health care spending, however, has enormous potential to save lives and reduce overall health care costs.

Unfortunately, rather than focusing on ways to enhance the role of pharmaceuticals in keeping people healthy, elected officials are in danger of chasing illusory savings via failed regulatory schemes such as price controls.

It is by now an often-repeated fact that the 80/20 Rule applies to health care: 80 percent of the cost is driven by just 20 percent of the people. These individuals most often suffer from multiple chronic diseases such as hypertension, congestive heart failure, diabetes and depression. The silver lining in this statistic is that the majority of the health care costs incurred by these patients can be prevented.

One of the most important elements of this strategy is to ensure that these patients have access to the prescription drugs that can prevent or reduce expensive complications of their conditions. It makes no sense to pay for kidney dialysis for a diabetic patient, for example, when the correct medication could have prevented the complication in the first place. Working with these patients to help them understand how to manage their disease, including access to the right medication and ensuring they take it as prescribed, not only improves their health but saves everyone the expense of needless time in the hospital.

A good example of such an innovative program is in North Carolina, where the city of Asheville has reduced its health care costs by focusing on education and prevention. The Washington Post reports that in Asheville, “pharmacists are paid to counsel patients, offering advice on diet, exercise, stress reduction and medications. Although drug costs rose, total health care spending on diabetics fell from $7,042 per patient in 1996 to about $4,000 apiece each year since the program began, in 1997.” City officials report savings of $4 for every $1 invested in the program.

Given the opportunity for innovation, it is disappointing to see that Georgia is allowing politics to trump policy and patients when it comes to prescription drugs. As opposed to most health care providers who are struggling, most pharmaceutical manufacturers are in good financial condition, making them an easy target. But easy does not equal right.

Georgia already benefits from substantial discounts on the purchase of pharmaceuticals for the Medicaid program. This discount program means the state purchases prescription drugs at 15 percent off the manufacturers’ wholesale price. These discounts amounted to $199 million in 2002.

Evidently, some people don’t think this is enough. A further discount has been proposed, referred to as a supplemental rebate. But it is a “rebate” that amounts to blackmail: If a drug manufacturer refuses to provide this proposed additional discount, its prescription drugs would be removed from the state’s preferred provider list. It effectively means that the company’s drugs will not be used unless a physician is willing to navigate a maze of bureaucracy on behalf of his or her patient.

Even riskier to patients are proposals that have recently emerged to set outright price controls on certain prescription drugs in Georgia. Basic economic principles clearly indicate that price controls limit supply and tend to cause unintended consequences. If price controls were such a great idea, why haven’t we put price controls on college tuition, gasoline and child care?

There are far more effective ways to manage pharmaceutical costs. The governor’s budget calls for a prescription drug audit. Evidence from other states shows that similar audits have identified 1-3 percent savings on pharmaceutical purchases by finding errors in the complex formulas used to calculate rebates and discounts. With Georgia purchasing more than $1 billion of prescription drugs annually, the savings should not be trivial.

A long-term approach would be to create a buyer’s market for prescription drugs. All too often, physicians and patients choose more expensive drugs than necessary because physicians rarely have access to pricing information and individuals have little financial incentive to care. Creating a buyer’s market would require making pharmaceutical prices more transparent, providing information on clinical effectiveness and creating the right incentives.

A hostile policy toward pharmaceutical companies is, in fact, detrimental to patients and their health care. Georgia needs to embrace objective policies that don’t restrict doctors’ and patients’ ability to choose the most effective medications on the market, but place the financial incentives in the correct places. As the state pursues strategies that result in better health care for less cost, policy-makers should keep in mind that limiting medical options and imposing price controls are policies that lead in the opposite direction.

Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (March 5, 2004). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.