FDA's drug policy bad for our health

David G. Tuerck

A question worth pondering over your morning coffee: If the federal Food and Drug Administration is supposed to protect us from unsafe drugs, who is supposed to protect us from unsafe drug policies?

All across the country, a dangerous game is being played with your health. State lawmakers from Maine to California are concocting complex tax and price-control schemes and bottling them as solutions to the current prescription drug crisis.

Like Dr. Feelgood peddling his wares, they say, "Swallow this and drugs will become more affordable. Swallow this and we'll have more money to spend." And if you ask about the side effects they'll look at you and say with a wink, "C'mon, everybody's doing it."

The exact design and scope of these schemes vary from state to state, but most are based on the federal Medicaid Drug Rebate Program. Under this program, enacted in 1990, drug companies pay a tax to have their products included in the Medicaid drug formulary so they can be prescribed by a physician without prior approval from the state Medicaid agency.

This tax (called a "rebate" in Medicaid-ese) is calculated as a percentage of a drug's average manufacturer's price. The tax effectively lowers the price a state pays for brand-name drugs to 15.1 percent below the AMP or to the lowest price paid by any private purchaser in the United States, whichever is lower. The goal was to reduce the price of prescription drugs paid by state Medicaid programs. But the result has been the opposite. The proliferating taxes and price controls are actually making drugs both less affordable and less accessible to the residents of states imposing them.

Drug companies routinely grant discounts to large purchasers (for example, HMOs), and in many cases those discounts are greater than the Medicaid program. The law prohibits a drug company from charging Medicaid a price higher than what it charges another buyer. But in doing so, it also reduces incentives to cut prices or to offer discounts to other buyers.

Indeed, both the General Accounting Office and the Congressional Budget Office concluded that one of the effects of the Medicaid rebate scheme was to dramatically reduce the discounts offered to other buyers.

As a result, people who have prescription drug coverage through an HMO or another group purchaser could have expected prices to go up as a direct result of this program. And that's just what happened. After the law was enacted, prices increased, particularly for drugs for which Medicaid was a large purchaser and those with competition from generics.

Not only does the law raise prices, it also reduces patients' access to the drugs they need. If the manufacturer refuses to go along with the rebate scheme, the state requires doctors wishing to prescribe a drug offered by that manufacturer to seek "prior authorization" before doing so. This is intended to pressure the manufacturer into offering the rebate, but the effect is to limit patients' access to needed drugs.

Now several states - Massachusetts, Maine, Vermont, Florida, Colorado and New Jersey among them - are experimenting with expanding the basic Medicaid rebate model to other populations, in some cases to all the residents of the state. To sweeten the pot, proponents of these expansions want to use prescription drug tax revenues to fund new public programs - with their attendant bureaucracy - to help people without other coverage pay for their medications.

One Massachusetts bill would mandate a 40 percent reduction in outpatient prices for drugs sold anywhere in the state. A drug company that refused to cooperate would be barred from selling in the state.

Proponents of these measures understand how dangerous a game they are playing. They know state taxes and price controls make drugs more expensive and threaten availability. They also know their efforts could end up reducing the incentive of the drug companies to develop and market new drugs. But when queried about these concerns, they typically shrug their shoulders and say, in effect, "Don't worry, we have everything under control."

This, however, is snake oil. Are we really supposed to believe that the same state government that can't come close to forecasting tax revenues one year out could control an industry that must make decisions affecting years, even decades, of product development? Don't bet your life on it.

David G. Tuerck is executive director of the Beacon Hill Institute and chairman and professor of economics and at Suffolk University.

This article appeared in the Boston Sunday Herald on May 5, 2002.

Format revised on August 18, 2004