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In the Public Interest

Pharmaceutical Prices
November 28, 2003

If Sam's Club can negotiate for lower pharmaceutical prices, why can't Uncle Sam? Because the approval by the Congress of a new pharmaceutical benefit for Medicare was saddled with a legal provision that prohibits the U.S. government from using its considerable consumer market power to negotiate for lower prices on medicines.

Our country already is spending more than 2 percent of GDP on pharmaceutical purchases, and these outlays skyrocketed, long before the Medicare bill was passed. Because the U.S. government is obligated to provide some coverage for pharmaceutical drugs under the new bill, one would think it would seek to at least have the flexibility to restrain corporate patent owners from charging excessive prices for their medicines. In the absence of even the possibility to negotiate lower prices, there will be no price restraints and therefore less money for medicine.

Every European country and most industrialized countries have authority in domestic legislation to negotiate lower prices for medicines under government reimbursement programs, and/or the authority to order the issuance of compulsory licenses in cases of abuses by patent owners. (A compulsory license enables price-lowering generic drug competition for on-patent products.) Canadian economist Aidan Hollis notes that a legalrequirement upon a government to provide coverage for drug purchases should logically be accompanied by powers to question or curb excessive prices -- or patent owners can and will make unreasonable and costly demands on taxpayers.

While the U.S. government has long been a patsy for the powerful drug manufacturers industry, it does have powers outside of the Medicare program to negotiate for lower drug prices, for example at the Department of Defense and at the Veterans Administration. And don't forget the case in 2001 when Secretary Thompson was able to cut the price of CIPRO (an antibiotic used to treat people exposed to anthrax) in half, after threatening to purchase generic versions, if Bayer did not offer the government an adequate discount.

The Medicare drug benefit will now take a different route. The federal government, acting on behalf of taxpayers and consumers, will be a passive consumer - accepting the prices offered by the drug industry. As Hollis predicts, the Medicare program will be exploited by drug makers.

This is particularly galling, because U.S. taxpayers already provide massive direct and indirect public subsidies, tax credits and free donations of government research for the development of new drugs.

The defense of the "don't negotiate prices" provision in the Medicare bill is the familiar argument that any measure to protect taxpayers orconsumers will undermine the development of new drugs. This argument is used time-and-time-again to justify an ever-expanding list of corporate welfare schemes and pricing abuses. Rather than simply accepting the notion that it is necessary to give unlimited pricing power to the patent holders and drug manufacturers (who spend more on marketing than on authentic research) Congress needs to explore more fiscally responsible alternatives.

Prudent negotiations of pharmaceutical prices will free up significant resources to provide greater coverage of seniors and will save taxpayers from being price gouged. The "don't negotiate prices" provision on the Medicare bill is the wrong approach. What we need is a new commitment to negotiate better terms for the money we spend (publicly and privately) on R&D. For more information visit: http://www.cptech.org