But the President and Congress MEANT Well

by Don Boudreaux on August 7, 2011

in Health, Other People's Money, Reality Is Not Optional, Seen and Unseen

There’s a shortage today of low-priced, life-saving drugs for cancer patients.  And the cause – surprise, surprise – is the Medicare Prescription Drug, Improvement and Modernization Act of 2003.  Ezekiel Emanuel, an oncologist teaching at the University of Pennsylvania, explains why in this op-ed appearing in today’s New York Times.

Here’s are the central paragraphs:

The underlying reason for this [failure of the laws of supply and demand to keep these drugs in adequate supply] is that cancer patients do not buy chemotherapy drugs from their local pharmacies the way they buy asthma inhalers or insulin. Instead, it is their oncologists who buy the drugs, administer them and then bill Medicare and insurance companies for the costs.

Historically, this “buy and bill” system was quite lucrative; drug companies charged Medicare and insurance companies inflated, essentially made-up “average wholesale prices.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed by President George W. Bush, put an end to this arrangement. It required Medicare to pay the physicians who prescribed the drugs based on a drug’s actual average selling price, plus 6 percent for handling. And indirectly — because of the time it takes drug companies to compile actual sales data and the government to revise the average selling price — it restricted the price from increasing by more than 6 percent every six months.

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.

The result is clear: in 2004 there were 58 new drug shortages, but by 2010 the number had steadily increased to 211. (These numbers include noncancer drugs as well. )


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