Investor's Business Daily, January 12, 2007

Health Care: The House has passed a bill that requires Washington to negotiate drug prices for Medicare patients. We hope the Senate is wiser. If not, we have to trust the president's veto threat isn't an empty one.

The bill passed 255-170 on Friday is a nasty piece of legislation. While requiring the secretary of health and human services to negotiate the bulk purchases of prescription drugs for Medicare patients might seem harmless, perhaps even needed, it will be counterproductive.

As Sally Pipes of the Pacific Research Institute wrote in IBD last week, " 'negotiations' are nothing but a political euphemism for price controls. If the federal government sets prices — or institutes a formulary that determines which drugs can be purchased — seniors would probably lose access to crucial medicines."

Or, as a Heritage Foundation paper notes, "negotiations" would be "an exercise of government power to fix prices and exclude from the market any company offering a drug at a higher price."

Democrats ignore or don't understand a key fact about price controls: They negatively affect profits.

That might not bother many on the left, and, indeed, it is likely to please quite a few on that side. But profits are needed in any industry to fuel development.

In pharmaceuticals, where about $1 billion is needed to bring a drug to market, development means the continued production of new life-saving and life-enhancing drugs. When profits dry up, so does the pipeline of new medication.

Advocates seem to be banking on a lack of public understanding of economics. But people are smarter than they think. Support for negotiated prices for Medicare drugs falls to 30% from 85% when consumers are told the negotiations will limit the choices Medicare patients have in choosing prescription drugs. Limited choice is a real consequence senior citizens will have to face should the bill become law.

Negotiated prices might help keep down Medicare costs. But according to the Congressional Budget Office and the Health and Human Services Office of the Actuary, they aren't likely to help taxpayers. What they're sure do is increase costs paid by non-Medicare patients. If drug companies are forced to sell large quantities of their products at low cost to the government, they have to make up the difference elsewhere.

Democrats complain nonstop about the high cost of medical care, and there's a straight line from that view to drug-price negotiations. But that view is obstructed. Increases in health care spending are trending downward. In 2005, according to a report released last week, the increase, at 6.9%, was the slowest in six years. In 2004 the increase was 7.2%; the year before, it was 8.1%.

Health insurers have been largely responsible for this through the use of free-market price signals. While providing an incentive for customers to buy generic and other low-cost drugs by charging a minimal co-payment, they build in a disincentive to buy the costlier drugs by charging much larger co-payments.

Another reason for the slowdown: Wal-Mart. (WMT) Yes, the retailing giant brought everyday low prices even to drugs, charging just $4 for prescriptions on some 291 of the most common generics.

The market, allowed to work, is a powerful tool. It brings lower prices and innovation. But that will be disrupted should Washington "negotiate" price controls for Medicare patients.

So may the entire health care market.