Investor's Business Daily, March 8, 2004

It's for the children. Except when it's not.

That dichotomy captures beautifully the recent Medicare legislation implementing a subsidy program for prescription drug purchases. The beneficiaries, even those only "29," will not have seen childhood in quite awhile, and most are far from poor.

On the other hand, most of those called upon to pay the future taxes needed to fund this new entitlement actually are our children and grandchildren, and indeed some will be poor.

But the kids do not vote in the here and now. And so the use of democratic processes to redistribute wealth from the future to the present is as American as the Fourth of July, a dynamic exacerbated by the short-time horizons of public officials focused upon the next election.

Accordingly, it is a minor miracle that the Medicare legislation actually includes some provisions truly farsighted, preserving future medical progress that really will be enjoyed by our children.

Prominent among these farsighted provisions is the "noninterference" language of the Medicare bill, which essentially prevents the federal government from using its massive size and purchasing power to drive down the prices of prescription drugs that will be offered in insurance plans participating in the Medicare drug program.

Paying For Failure

How can a failure to force sharp discounts be farsighted? Consider the process through which a new drug is developed successfully and then brought to market: A huge investment (of about $800 million on average) in research and development is made over a period of years, after which the new medicines are sold and revenues are received.

Actual production costs for the new drugs -- after the huge initial investment in R&D -- in most cases are relatively low. In other words, given that the initial investment has been made, the drug companies rationally will produce and sell the drugs as long as the ongoing costs of production, distribution, insurance and the like are covered by prices.

If such post-investment costs are, say, a dime per pill, then that is what it takes to preserve the availability of the given medicine regardless of the magnitude of the initial investment.

Even if production costs after R&D are high, the price needed to preserve availability is lower than that needed to recover the initial R&D effort as well. This eternal problem of financing the initial development is magnified by the fact that many potential drugs consume vast R&D resources but then prove unsafe or ineffective; they are the medical equivalent of dry holes.

And so the long-run problem is simple: In order to preserve the creative processes through which new and better medicines are developed, market forces must be allowed to engender competitive prices that cover both expected R&D costs and production costs; thus can the miracles wrought by the modern science of pharmaceutical medicine continue.

That is how, to take one prominent example among many, AIDS has come to be a far more treatable and indeed chronic condition than was the case only a few years ago, when a diagnosis of AIDS literally was a death sentence.

Yes, paying these past and future R&D costs can be painful for those who need medicines today. But we are in no position to complain, in that the availability today of the drugs that we need is the result of the past payment of those costs by those who have gone before. After all, the "price" of a potential drug undeveloped and therefore unavailable is infinite.

The long-term interests of patients are served by prices neither artificially high nor low; instead, prices should be competitive. The Medicare bill as passed provides powerful incentives for medical insurers to negotiate competitive prices with the drug producers; it avoids the imposition of one-size-fits-all bureaucratic rules. And that is why the noninterference provisions of the new Medicare law are remarkable politically: Public officials focused on the next election nonetheless bit the bullet and refrained from mortgaging the future in favor of the present.

But because the noninterference provisions swim against the tide of immediate pressures from interest groups and the short-time horizons of public officials, it is unsurprising that new efforts to do away with those provisions already are prominent in Congress.

That this change would lead inexorably to price controls and patient restrictions is obvious: That is precisely what has happened in the Medicaid and Veterans Administration drug programs, in which noninterference rules are absent and in which federal bureaucracies impose price controls and choose formularies (the drugs eligible for the programs) and other dimensions of patient care in a tail-chasing effort to constrain budget costs.

Lurking beneath the dark surface of short-term political pressures is an enormous iceberg threatening the long-term development of treatments alleviating human suffering. The noninterference provisions of the Medicare bill represent a farsighted detour around that danger, and other statutory and regulatory changes would yield bigger benefits still.

The delays -- and huge interest costs -- caused by the Food And Drug Administration approval process can be reformed without compromising safety and with actual improvement in the effectiveness of drug treatments. The trade-off between careful evaluation of new medicines and delays in subsequent availability must be reviewed in the context of the incentives of federal decision makers.

For The Children

The patent system must be reformed, perhaps in terms of differentiation among products that are relatively less and more costly to develop. Policies must be implemented to end the free ride that foreign governments obtain from Americans in terms of covering R&D costs; that is the deeper significance of the current tug of war over the reimportation of drugs from other nations.

More generally, the narrow focus on the cost of pharmaceuticals has obscured the larger cost reductions made possible by new drugs, in the form of a reduced need for costly hospital services and the like. An analysis of costs incorporating this larger perspective would help to preserve a farsighted orientation in the face of political pressures to the contrary. We should do it for the children.

Sally C. Pipes is president and CEO of the Pacific Research Institute. She can be reached at spipes@pacificresearch.org.