Just Say No to Pay-fors

Just Say No to Pay-fors

The Children’s Health Insurance Program (CHIP) was established in 1997—a program that gives states federal matching funds to provide health insurance to children from families that are too wealthy to qualify for Medicaid, but too poor to afford private insurance. However, current federal funding for CHIP expires on September 30th. Continued federal support for the CHIP program requires Congress to extend its financing.

The Congressional Budget Office (CBO) has estimated that the CHIP extension will increase the budget deficit. Therefore, extending CHIP without increasing the federal budget deficit requires Congress to either reduce spending on CHIP, reduce spending elsewhere, or increase taxes or other revenue sources.

While these pay-fors masquerade as fiscal responsibility, in practice, they are the exact opposite. Pay-fors perpetuate excessive tax complexity and spending rigidity to the detriment of effective fiscal policy. They also reduce America’s economic growth potential.

Economists as far back as Adam Smith have noted that taxes should be stable, transparent, and impose the least number of possible distortions and hardships on the economy. Regardless of the pay-for considered, these narrowly targeted policies, which ostensibly raise money for the federal government, often violate these principles and lead to bad policy outcomes.

And, so it is with the current pay-for Congress is considering for extending CHIP: the Creating and Restoring Equal Access to Equivalent Samples Act (CREATES Act).

The CREATES Act impacts a small minority of drugs (significantly less than 1 percent of all drugs approved by the FDA) that must comply with the FDA’s most comprehensive safety requirements. These requirements are known as “risk evaluation and mitigation strategies” (REMS); and may be subject to restrictions called “elements to assure safe use” (ETASU).

The REMS requirements are developed by the FDA working with the branded manufacturers. They are designed to balance out the higher risks associated with these medicines with the value they provide patients with life-threatening illnesses.

The drugs that are subject to the REMS standards (and the REMS with ETASU standards) are subject to rigorous processes to safeguard patients against severe, or even fatal, consequences. Existing regulations also contain processes that enable generic manufacturers to purchase the necessary samples of REMS drugs so that these companies can test their products and introduce a generic competitor to the branded drug, once its patent has expired.

Despite these processes, generic manufacturers allege that their branded counterparts are inappropriately using the REMS requirements to avoid selling the samples that generic manufacturers need, and, therefore, the branded manufacturers are inappropriately blocking the introduction of generic alternatives into the market. The CREATES Act turns these objections into legislative action.

As I have written about here, in reality the CREATES Act is a giveaway to trial lawyers who gain a new, and lucrative, way to file questionable lawsuits against branded drug manufacturers. It encourages excessive litigation by requiring brand name pharmaceutical companies to conclude what can be a very complicated negotiation process, and turn over the required samples to generic manufacturers, within 31 days after the initial request was made, or be subject to costly lawsuits.

The lawsuit threat, tilts the negotiation in favor of the generic manufacturers. The CREATES Act may also jeopardize patient safety because it increases the likelihood that the people administering these potent medicines may lack the appropriate training and knowledge to do so safely; and, the Act could force branded manufacturers to divert medicines in short supply from patients to generic manufacturers, thereby exacerbating any potential shortage problems.

Additionally, the potential savings the CREATES Act are supposed to generate are unlikely to emerge. Therefore, using the CREATES Act to offset the higher CHIP expenditures is budget chicanery that will simply increase the already out of control federal budget deficit.

Of course, none of these issues has anything to do with whether CHIP should be extended, which is part of the problem with pay-fors. Pay-fors combine an unrelated issue (the CREATES Act) with a popular program (CHIP) in order to pass a bill that otherwise should not be passed.

Congress should not be adding more complications to the already convoluted federal budget and tax system. Instead of searching for pay-fors and other short-cuts, Congress should do its job and pass an effective budget that prioritizes spending based on the value each program creates.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.