NCPA - National Center for Policy Analysis


October 25, 2005

The Department of Veterans Affairs (VA) does good work, but it is not a viable model for Medicare, says Frank Lichtenberg, professor at the Columbia University Graduate School of Business.

In a recent report for the Manhattan Institute, he says veterans receive poor care because the VA discourages access to new drugs in an effort to control overall pharmaceutical costs. Consider:

  • Only 38 percent of the drugs approved in the 1990s, and 19 percent of the drugs approved by the Food and Drug Administration since 2000, are on the VA National Formulary.
  • The use of older drugs in the VA system reduced life expectancy by 2.04 months; the value of this reduction in longevity may be nearly $25,000 per person.
  • Veteran's life expectancy increased substantially before the National Formulary was introduced (between 1991 and 1997) but did not increase, and may have declined, after the Formulary was introduced (between 1997-2002); yet, the life expectancy of all U.S. males increased both before and after 1997.

In an interview with Investor's Business Daily, Lichtenberg explains why the VA's drug-price bargaining is wrong for Medicare. He believes it is a fallacy to say that just because you can give a low price to a relatively small segment of an entire market, that it should be the price everyone pays. If all Americans got the same price, he explains, total revenue of the pharmaceutical industry would be reduced and would undermine development of new drugs.

Pharmaceutical innovation plays an important role in reducing hospital and long-term-care use, and at $2,000 a day, even a small reduction in hospitalization means considerable savings. Lichtenberg does not think drug prices are high relative to value they deliver.

Source: Peter Benesh, "Want Cheap Drugs? Don't Scrimp on Quality, Says Prof," Investor's Business Daily, October 24, 2005; Press Release, "Cheaper but Less Effective Drugs: Should that be the Model?" Manhattan Institute, October 7, 2005; and Frank R. Lichtenberg, "Older Drugs, Shorter Lives? An Examination of the Health Effects of the Veterans Health Administration Formulary," Manhattan Institute, Medical Progress Report No. 2, October 2005.

For Press Release:

For Lichtenberg Report:


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