Here's an excerpt from, "A Plan That Leads Health Care To Nowhere":
The government purchases far more drugs than any other entity. So it can effectively dictate the price it will pay. Such price controls may seem like an effective way to cut spending--but they'll actually reduce the supply of available drugs. Pharmaceutical firms will simply stop selling their wares if the government forces them to take a loss on every transaction.(Read the full text of "A Plan That Leads Health Care To Nowhere".)
Consider the drug benefit administered by the Department of Veterans Affairs. The VA pays about 40% less for prescription drugs than Medicare Part D, so many pundits have held it up as an example of how the feds can effectively rein in drug spending.
But the VA has only been able to deliver those savings by covering fewer drugs.
Health care economists Austin Frakt, Steve Pizer and Roger Feldman recently compared the VA's drug benefit with Medicare Part D at the request of the Department of Veterans Affairs and the Robert Wood Johnson Foundation. They found that the average Medicare Part D plan covered 85 percent of the nation's 200 most popular prescription drugs -- while the VA formulary covered just 59% of those drugs.
That makes sense. The more comfortable benefit managers are saying "no," the more success they'll have demanding low drug prices. Patients, of course, will bear the downside--fewer choices.
Price controls will also discourage research into the next round of innovative therapies. Developing just one new medicine costs a drug company nearly $1.5 billion dollars. If investors fear that Medicare will refuse to cover new, expensive treatments, then they'll simply refuse to fund the research and development needed to create new drugs.
Hence, the effect of the central-planning approach is the immediate restriction of benefits available to those receiving government health care, and the strangling of future innovation that could benefit us when we're sick and in need of new treatments.
We've already seen this play out in other countries like Great Britain, where access to new drugs is limited by government policy. Will this be our future here in the US?