12.05.2011 0

Obama Administration Denies Federal Drug Price Controls are Killing Americans

By John Vinci — While Americans are dying because of a drug shortage problem serious enough to call a national emergency, the Obama Administration is denying that Medicare price controls are the cause.

Two hearings now have been held on the government induced prescription drug shortage in the House and another has been requested by ranking members of the House Committee on Oversight and Government Reform.  The Senate will hold a hearing of its own on Wednesday.

In a nation as prosperous as our own — how can we have such drug shortages?  That was the question the minds of congressmen in a hearing on Nov. 30, 2011 before the House Oversight and Government Reform’s Subcommittee on Health.

Four out of the five expert witnesses before the Subcommittee agreed that a Medicare price control policy has disincentivized the production of certain drugs and is at least part of the reason we now have the drug shortages that are killing Americans.

The Medicare Modernization Act of 2003 introduced the “average sales price” repayment method for certain drugs.  Instead of paying drug manufacturers based on the “wholesale acquisition cost,” Medicare pays based on the average price of the medication six months ago plus six percent.  So, if the costs of producing the medicines increases more than 6 percent in six months, the manufacturer will have to take a loss.

The fifth expert agreed that Medicare’s price controls might be a factor, but refused to say so without further evidence.

However, the Obama Administration denies that Medicare pricing policies are a major problem.  Dr. Howard K. Koh, Assistant Secretary for Health at the Department of Health and Human Services , said as much in Congressional testimony House Energy & Commerce Committee’s Subcommittee on Health on September 23, 2011.

Congressman Brett Guthrie (R-KY) asked Dr. Koh the following question:

I had a group of oncologists in the other day … and they say they literally have to make choices about who they take care of because they don’t have the drugs available.  So I asked kind of the question, “I can’t believe a company won’t make them if you have the demand for them.”  And they told me that this particular type of drug–a generic—[is] priced differently in the federal government.  So Medicare actually prices these drugs different than other drugs. Is what they were saying true?

Dr. Koh’s response:

… We have a role of Medicare here that reimburses according to what’s called the average sales price.  So that is one factor here but we don’t view that as a significant issue in driving the shortages we’re seeing here.

Unfortunately, we have bureaucrats in the Obama Administration that believe the solution is more government control and not removing government restraints on the marketplace.

Here’s a dialog between Rep. John Shimkus (R-IL) and Dr. Koh from the same hearing:

Shimkus:       Why doesn’t the shortage of a product in this sector then send an increased price signal to manufacturers for them to then produce the good?

Koh:      Well, we have come to learn that the standard economic principles of supply and demand…

Shimkus:       And the question is why is that distorted? That . . .  I think that is the basic fundamental question of this problem.  What has distorted the fundamental principles of supply and demand? . . . but I think that is the heart of this issue.

. . .

Koh:      First of all, these agreements are made often through these long term contracts, and so also this whole process involves multiple stakeholders–especially and including the pharmacy benefit managers and the group purchasing organizations. So it complicates this environment and sort of does not make relevant the sort of standard supply and demand economic principles that we would see in other businesses.

So the economic principles of supply and demand are not relevant?  Maybe we heard him wrong.  But Dr. Koh said it again in questioning by Dr.  Phil Gingrey (R-GA):

Gingrey:      Are there any government rules, regulations, law, pharmacy benefit managers—something that would cause [drug manufacturers] not to be able to raise their prices even though the market would certainly let them do so otherwise?

Koh:     . . . [W]e have come to understand that this is a complex business situation where the standard economic principles of supply and demand do not easily apply.

We do not deny that this issue is complex.  Some of the best conservative experts admit as much.  Nor do we deny that there are other issues contributing to the problem.  Says Americans for Limited Government president, Bill Wilson, “The complexities of our drug shortage problem are for the marketplace to resolve.   Government price controls and over-burdensome regulations not only create more complexity compounding the problem they remove the profit incentives manufacturers have for solving the supply problem.”

If a price control created in 2003 could cause shortages such as we are seeing now, what might the regulations and price controls of Obamacare do to the health care marketplace a decade from now?

John Vinci is a staff attorney with Americans for Limited Government and is the editor in chief for the www.obamacarewatcher.org website.


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