Ten Myths about the Market for Prescription Drugs
Myth No. 8: Price Controls Would Reduce Drug Costs for Seniors
The Allen bill would force pharmaceutical firms to give pharmacies the same discount for drugs bought by those on Medicare that the Veterans Administration gets under the Federal Supply Schedule. Supporters say the proposal is market-based and would make drugs more affordable; in fact, it would impose price controls and would almost certainly raise the cost of drugs for most seniors. Further, it would not extend prescription drug coverage to those who lack it.
"If the Drug Fairness Act became law, it would drive up prices for seniors."
Why would drug prices for seniors rise if the Drug Fairness Act became law? First, at the earliest opportunity drug manufacturers would increase steeply the prices in the Federal Supply Schedule. Further, pharmacies would have to prove that each Medicare beneficiary was eligible for the discount, since drug manufacturers would want to limit their financial exposure. According to Mick Kolassa, a professor in the College of Pharmacy at the University of Mississippi and an expert on drug prices, the paperwork would cost about $15 per prescription to process and collect.28 The pharmacy would pass this cost on, if at all possible. Thus seniors would likely end up paying more for prescription drugs than before.
In addition, price controls mandated by the Allen bill for one group of seniors would drive up costs for many other consumers. This has been the experience in the past. For example, in 1990 Congress decided to require drug manufacturers to give state Medicaid programs rebates for outpatient drugs based on the lowest prices they charged other purchasers. Because of the size of the Medicaid market, many drug manufacturers sought to cope with the requirement by simply reducing or eliminating the discounts to other purchasers. The result: drug spending went up in the private sector.
According to the GAO, the larger the government market, the greater the economic incentive for manufacturers to raise schedule prices to limit their losses. Since about 65 percent of seniors now have some form of private drug coverage, imposing price controls now would have an effect similar to what happened with Medicaid in 1990.