NCPA - National Center for Policy Analysis


March 10, 2005

When the Medicare prescription drug benefit is fully implemented in 2006, the government will account for about 60 percent of all drug purchases in the United States. Advocates are pushing for allowing the government to negotiate purchases directly with drug manufacturers in order to keep prices low.

But establishing widespread price controls -- similar to those imposed by Medicaid and the Department of Veterans Affairs -- come at the cost of reducing needed research and development of new drugs, says the Manhattan Institute. In analyzing historical data on government influence in the pharmaceutical industry, researchers discovered:

  • Between 1992 and 2001, a 10 percent increase in the government's share of spending on pharmaceutical drugs was associated with a 6.7 percent annual decline in the growth of drug prices.
  • Between 1960 and 2001, pharmaceutical prices would have been about 35 percent higher without government influence in purchasing.
  • However, during the same time period, drug companies would have spent about $188 billion more in research and development without government influence pushing drug prices downward.
  • Government influence on prices cost the U.S. economy about 140 million life years between 1960 and 2001.

Furthermore, as government spending encompasses a larger share of future drug expenditures (due to the new Medicare prescription drug benefit) research and development spending will drop by about $372 billion, or 39.4 percent.

While lower drug prices are politically popular, lawmakers must debate the trade-off between lower drug prices now and future benefits lost due to less spending on research and development.

Source: John A. Vernon, Rexford E. Santerre and Carmelo Giaccotto, "Are Drug Price Controls Good for Your Health?" Manhattan Institute, Center for Medical Progress, December 2004.


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