Beset by crumbling co-ops and pricier premiums, Obamacare is falling apart before our very eyes. But that hasn’t dented President Obama’s resolve.
Waging a crusade against “skyrocketing” prescription drug costs, President Obama has called for the federal government to have “the authority to negotiate prices for certain high-priced drugs.” In other words, let the government use price controls to keep drug prices low. (Pharmaceutical companies should have foreseen as much before they decided to support Obamacare’s passage.)
The Obama administration has enlisted the help of so-called “academic institutions” like the Institute for Clinical and Economic Review (ICER) — the kind of dubious nonprofit organization that my organization monitors closely—to justify price-setting and an ever more intrusive federal government.
But defending price controls is no easy task. Government price-setting disrupts the incentives that motivate pharmaceutical companies to release new drugs and improve existing ones. The free market incentivizes drug producers to deliver a quality product to those in need by introducing a financial reward for doing so, so that higher quality leads to more sales and cushier profit margins. It’s a win-win scenario: Consumers receive more effective drugs, while producers are encouraged to keep meeting their demand.
But if a better drug doesn’t earn a higher price, then a producer has no incentive to improve a product and innovation stalls, which ultimately hurts the sick. Another response drug-makers might make to price controls is limiting supply, which leads to shortages and even higher prices.
Take childhood vaccines. In 1993, the Clinton administration created the Vaccines for Children program, which sought to rectify “shocking” childhood vaccine prices through government price controls. Within eight years, eight of the 11 childhood vaccines faced shortages, including those for diphtheria, measles, and rubella. Worse yet, the number of companies providing vaccines dropped to four — down from 26 in the 1960s.
That is a cautionary tale for today’s pharmaceutical industry. The Tufts Center for the Study of Drug Development estimates that bringing a single new drug to market costs over $2.5 billion on average. If a drug producer doesn’t receive adequate compensation for such a staggering cost, then why keep producing?
Despite the drawbacks, the Obama administration has many allies in its fight to mandate price controls — from the halls of Congress to the nonprofit sector. Perhaps the most vocal is the aforementioned Institute for Clinical and Economic Review, a nonprofit group based in Boston that claims to study the value of prescription drugs to determine which bring the most benefits for their list price.
ICER has become the federal government’s activist nonprofit of choice when it comes to identifying drug costs and finding prices “sustainable to the health care system.” Its CEO Steven Pearson says, “We want more patients to be able to access drugs that will work for them at a price they can afford.”
On the surface, ICER is a feel-good “academic institute” (in the credulous words of USA Today) that focuses on helping consumers. But, in reality, the group is heavily funded by insurance companies whose own incentives are clear: Keep drug prices artificially low through government price-setting in order to book bigger profits.
Pearson founded ICER in 2006 with a $430,000 research grant from the Blue Shield of California Foundation—an offshoot of a major California insurance provider. (The same Blue Shield foundation also gave the group an $850,000 grant in 2013.) ICER now lists 12 insurance companies, foundations, or trade associations as funders, including United HealthCare and the Aetna Foundation.
By raking in insurance dollars, ICER is effectively snubbing some corporations to get in bed with others. The organization often responds to this charge by highlighting monies that it’s received from pharmaceutical groups, but some of those entities object. The National Pharmaceutical Council, for example, “takes exception [to the] continued portrayal of us as an organization that is supportive of ICER and its value assessment process.”
ICER’s ties to the insurance industry point to anything but an impartial observer. So does Pearson’s admission that the lack of a government price-setting system is “a reflection of a political culture…hostile to considerations of cost-effectiveness in funding and insurance coverage decisions.” Translation: Sick people need to stop fighting against price controls.
The truth is less kind. If Americans want both innovation and incentives that drive lower prices, then they will have to substitute competition in the marketplace for government-run health care.
Scott Walter is the president of the Capital Research Center, an investigative think tank in Washington, D.C., whose donors do not include drug companies. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
