Health Care Issues

Price Controls

Pharmaceutical therapy is our most efficient form of health care. For example:

  • Drug therapy for coronary artery disease costs about $1,000 a year compared to $41,000 for bypass surgery.

  • Drug therapy for ulcers costs $900 a year compared to $25,000 for surgery.

  • Drug therapy for depression costs $5,000 a year compared to $73,000 for institutionalization.

Since 1965, drug costs have increased more slowly than any other type of medical care. The average out-of-pocket cost per person for drugs is $232 a year, less than in most other industrialized countries. But because health insurance usually covers 80 to 100 percent of hospital and physician costs and only 60 percent of drug costs, a patient can pay more out-of-pocket for $1,000 worth of heart medicine than for a $41,000 bypass.

Sensitivity to out-of-pocket drug costs has led to proposals for pharmaceutical price controls. But if all drug profits were eliminated, health care spending would decrease less than 2 percent. However, the $10 billion a year that drug companies invest in developing new drugs and other products would fall dramatically.

Science has led to a greater understanding of the causes of disease and potential cures. At the same time, the pharmaceutical marketplace has become more competitive, creating pressure on both prices and earnings. Breakthrough drugs soon find competitors, and generic alternatives to existing drugs command a growing share of the market.

To survive, pharmaceutical companies have had to restructure and devote billions of dollars to innovative drug and biotechnology research. The Office of Technology Assessment estimates that it costs $359 million to develop a single new drug, and fewer than one in 10 companies recovers this cost.

By eliminating profit incentives, we may save money in the short run - but at the cost of denying millions of people quicker access to drugs that can save their lives.

Source: Robert M. Goldberg, "Pharmaceutical Price Controls: Saving Money Today or Lives Tomorrow?" IPI Policy Report No. 123, September 1993, Institute for Policy Innovation, 250 S. Stemmons, Suite 306, Lewisville, TX 75057, (972) 219-0811.

Return to Pharmaceuticals

Downside Of Free Vaccines

The Vaccines for Children Program (VFC) implemented in 1994 was unnecessary and may discourage the development of new vaccines, say economists Henry Grabowski and John Vernon, both of Duke University. They say increased government purchases of vaccines at below-market prices reduces incentives to invest in new and improved children's vaccines.

The VFC program was based on claims that ";only 40 percent to 60 percent of preschool children get the recommended shots"; and that the high cost of vaccines was a major cause for this low rate of vaccinations.

However, a 1995 General Accounting Office report concluded that cost wasn't a major barrier and ";immunization rates for preschool children before the VFC program were at or near the 90 percent national goals for 1996.";

In fact, vaccine purchases under federal and state programs had already increased from about a third of the market in the mid-1980s to roughly half the market by the early 1990s.

  • Government-purchased doses for the vaccines in the VFC program accounted for 65 percent to 70 percent of the net doses distributed in the U.S. in 1996 according to preliminary data.

  • The National Centers for Disease Control projects the government's purchases of these drugs could rise to 80 percent of the total.

  • In 1993, for three core pediatric vaccines -- DTP, MMR and oral polio -- the government paid prices that were a fraction of the market price: 26 percent, 52 percent and 18 percent, respectively.

Grabowski and Vernon say that as government becomes the dominant consumer of vaccines, it will be able to negotiate sizable discounts from the pharmaceutical companies. An increase in government purchases at discounted prices will reduce cash flows for vaccine firms.

As the VFC program displaces most of the private market, it will create a high level of uncertainty among innovators and investors about future returns that can be earned by breakthrough vaccine products. The risk is that government vaccine programs will discourage research and development into new vaccines.

Source: Henry Grabowski and John Vernon, ";The Search for New Vaccines: The Effects of the Vaccines for Children Program,"; Book Summary, October 1997, American Enterprise Institute, 1150 Seventeenth Street, N.W., Washington, D. C. 20036, (202) 862-5800.

For AEI's book summary http://www.aei.org/bs8117.htm

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