Arnie versus the drug companies

In the Golden State, Gov. Arnold Schwarzenegger announced on July 22 his new discount drug plan, described as a “voluntary” agreement between pharmaceutical companies and the state of California. But it’s more like a raw deal. What he is really selling is price controls on pharmaceuticals.

The California Prescription Drug Initiative calls upon drug manufacturers to offer 5 million low-income Californians major discounts on prescription medications — up to 40 percent on brand-name drugs and a whopping 60 percent on generics.

Presumably, drug companies should offer these discounts out of the goodness in their hearts. But if they don’t comply? Well, then they’ll be coerced by the Terminator.

Companies failing to sell drugs at the government-imposed discount prices within five years can be kicked out of Medi-Cal, the multibillion-dollar health coverage system for low-income Californians.

Specifically, the discounted drugs would be available to uninsured Californians with incomes below 300 percent of the federal poverty level. That’s $60,000 for a family of four. Certain Californians — like a family earning less than $68,310 — with significant unreimbursed medical expenses would also qualify.

“Our hope is the hammer won’t be necessary,” California Secretary of Health and Human Services Kim Belshe says.

And the governor’s plan is just a variation on Democratic Assembly Speaker Fabian Núñez’s, AB 2911. In the Núñez bill, the income level for a family of four being eligible for the discount plan is $66,000 and the number of years that the drug companies have to offer the discounts is three rather than five.

There are good reasons to resist Gov. Schwarzenegger’s drug deal.

For starters, most drug companies already have programs offering discounted — or even free — medicines for those in need.

Gov. Schwarzenegger might argue that beneficiaries of these existing discount programs must apply individually with every pharmaceutical company whose drugs they require.

But that’s because drug companies aren’t legally allowed to combine their individual plans into one simple-to-join program. Anti-trust laws prohibit them from doing so. It’s illegal for private companies to work together to set prices — even discount prices.

In other words, Gov. Schwarzenegger wants the Golden State to do what is illegal for pharmaceutical companies to do — fix prices. His plan might make sense if government price controls actually worked. But in reality, they almost always have the exact opposite effect of what is intended.

In the case of the Prescription Drug Initiative, pharmaceutical companies would need to compensate for the forced discounts by raising prices on people who don’t qualify.

A family of four with a household income of $70,000 and a child with cancer might see its drug bills increase to offset discounts on hyperactivity medicines available to a family making $68,000.

In the long term, Gov. Schwarzenegger’s price controls would have an even more perverse effect. They would lead to fewer new medicines being developed, particularly if other states follow California’s example.

Today, it costs between $800 million and $1 billion to bring a new drug to market. Cancer patients have hope precisely because companies are willing to risk that money in developing drugs like Avastin, Erbitux, Gleevec, Herceptin, Nexavar, Sutent, and many others.

Ironically, if Gov. Schwarzenegger’s plan had been implemented across the country 25 years ago, very few of these drugs would have been invented in the first place. There would be no life-saving medicines to discount.

If state governments make breakthrough drugs unprofitable, companies will simply stop trying to invent them. Researchers at the University of Connecticut’s Center for Healthcare and Insurance Studies found that, since 1960, government interference in drug pricing caused $188 billion in lost spending on research and development. The “lost” medicines that might have been developed with that money could have saved 140 million life years.

There is a better way.

The market economy remains the best supplier of human needs —including health needs. It has made theUnited States the world leader in the research and development of new medications and in health care overall.

Rather than pushing for socialist price controls, Gov. Schwarzenegger should pursue free market ideas. He should support the federal legislation proposed by Rep. John Shadegg, R-Ariz., which would allow people to shop for insurance across state lines. He could make health insurance premiums tax deductible. And he could promote again changing the tax code in California so that contributions to health savings accounts are not subject to state income tax, something he does support.

Such policies would help people afford the drugs they need without creating economic distortions. And there would be no strong-arm tactics required. Of all people, the Terminator should know better than to give the citizens of California a raw deal.

Sally C. Pipes is president & CEO of the Pacific Research Institute and author of “Miracle Cure: How to Solve America’s Health-Care Crisis and Why Canada Isn’t the Answer.” A version of this op-ed appeared in The Wall Street Journal’s OpinionJournal.

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