Senate Democrats think they have found a winning political issue by trying to make prescription drug manufacturers the scapegoat for a malfunctioning health-care system. Ironically, the prescription drug industry has been so successful because it is one of the few areas of health care that hasn’t been ruined by politicians. At least not yet.

In 1965, when Medicare and Medicaid were created, spending on prescription drugs represented nine percent of the nation’s health-care bill. In 2000, drug spending was still nine percent, but that obscures the vast changes that have occurred, with prescription drugs assuming a much more important role. Today’s new drugs have contributed to dramatic improvements in health and have substituted for more expensive forms of care.

Columbia University professor Frank Lichtenberg analyzed data from the 1996 Medical Expenditure Panel Survey and found that spending on newer, more expensive drugs is associated with: (1) lower mortality rates; (2) fewer, shorter, and less expensive hospital stays; (3) fewer missed work days; (4) reduced non-drug medical spending; and (5) an overall reduction in the cost of treating a medical condition, compared with spending on older, “cheaper” drugs.

A recent study by PricewaterhouseCoopers for the HMO industry found that prescription drug spending, together with other types of medical advances, accounted for just 22 percent of the increase in health insurance premiums for 2002. And PricewaterhouseCoopers was careful to note that this estimate does not reflect any of the savings in other medical spending that Lichtenberg found. By comparison, the study found that 27 percent of the premium increases were caused by government mandates and regulations, lawsuits, risk management items such as malpractice insurance, and fraud and abuse. For those costs, there is no offsetting reduction in health spending.

Moreover, to the extent that there has been unnecessary usage of high-priced drugs, it has been caused by outdated insurance designs that don’t allow for a proper alignment of benefits and costs. This will be corrected as consumer-driven plans proliferate.

What really bothers Democrats is that prescription drugs generate profits. This position was best expressed by Senator Debbie Stabenow (D-MI), who commented: “When an industry is allowed to make 18 to 20 percent a year, at the same time it’s raising prices three times the rate of inflation, and people who need life-saving medicine cannot afford it, I think it’s time to ask where the corporate responsibility is.” Actually, the corporate responsibility is to maximize profits that, in turn, will finance the greatest amount of research and development on new and better drugs.

Harvard University professor F.M. Scherer measured drug industry trend lines and found that the growth rate in research and development expenditures has trended at 7.5 percent per year, while the growth rate for gross profits has trended at 4.2 percent per year. More importantly, he found that the variations around the two trend lines were closely correlated. Higher than normal profit growth was associated with higher than normal growth in spending on research and development. Likewise, lower than normal profit growth was associated with lower than normal R&D growth.

Still, for the large number of seniors who don’t have any coverage at all for prescription drugs, the success story of the drug industry may be something they can’t participate in. The big problem is that Congress has avoided debating how to give Medicare beneficiaries a choice of insurance plans with integrated prescription drug coverage, just like Congress itself has. So while Stabenow and Congress busily dodge their political responsibility, drug companies have stepped in to help seniors without drug coverage.

Many drug companies have created assistance programs targeted to low-income seniors. For instance, Pfizer, the world’s largest drug company, has an assistance program that allows low-income seniors to buy a one-month supply of any of its drugs for a flat fee of $15. Other companies feature similar programs. PhRMA, the Pharmaceutical Research and Manufacturers of America, has sponsored a web site, www.rxhope.com, to make it easy for people to apply.

Senior citizens and an aging baby-boom generation are demanding new and improved drugs—and they will need them. To note just one example, the number of Americans with Alzheimer’s disease is expected to triple by 2050. But if politicians give us more price controls, Americans won’t get what they need and their health will suffer. And cures for Alzheimer’s, AIDS, cancer, and many other life-threatening illnesses will be jeopardized.

Chris Middleton is the Senior Health and Tax Policy Analyst for the Center For Entrepeneurship of the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.