Once again, budget negotiators in Washington D.C. are scrambling to put together a cogent spending plan for the federal government. And, once again, as part of this last-minute scramble, Congress is considering ad-hoc budget gimmicks to pay for spending instead of budgeting within the government’s affordability constraint. Or, as President Reagan might have said, “there they go again”.
Employing budgetary gimmicks and pay-fors is one of the many reasons the federal government’s fiscal spending is out of control, and many problems are created when Congress budgets by pay-for. Paramount among these, the current size and composition of federal government spending has skewed away from providing value-added public goods and services toward growth detracting expenditures (see the Pacific Research Institute’s Beyond the New Normal series of reports here for more details).
The surest way to realign spending away from growth detracting programs toward value-added programs is comprehensive budget process reform. In contrast to the current tendency to budget by pay-for, an effective budget process would establish a budget cap that is affordable to the taxpayers, and then, within this broad budgetary cap, allocate spending based on each program’s merits.
The current practice of budgeting by pay-for creates the opposite incentives. It encourages Congress to adopt policies that have no merit, but become law because, on paper at least, they raise revenues for the federal government.
For example, one of the current pay-fors Congress is considering is the Creating and Restoring Equal Access to Equivalent Samples Act (CREATES Act). The Act has nothing to do with establishing a sound revenue source for the federal government. Further, as I have written about here and here, the CREATES Act is bad policy that should not be implemented on its merits.
The Act would impact significantly less than 1 percent of all drugs approved by the FDA that, due to their higher risks, must comply with the FDA’s most comprehensive safety requirements (known as “risk evaluation and mitigation strategies” (REMS)). These rigorous standards are developed by the FDA working with the branded manufacturers, and balance out the severe (even fatal) risks associated with these medicines with the value the medicines provide to patients with life-threatening illnesses.
Even in the case of these higher-risk medicines, policy should encourage a competitive landscape once the patents on these REMS drugs expire. To achieve this, existing regulations contain processes that enable generic manufacturers to purchase the necessary samples of drugs so that these generic companies can create a competitive product.
The CREATES Act has been proposed because generic manufacturers allege that branded competitors inappropriately use the REMS processes to avoid selling the samples that generic manufacturers need to introduce lower-cost generic alternatives into the market.
In practice, the CREATES Act is a gift to the 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 also jeopardizes 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 expenditures is budget chicanery that will increase the already out of control federal budget deficit.
Which brings us back to the federal government’s broader spending problem. Budgeting by pay-fors encourages wrong-headed policies (such as the CREATES Act) that the government should not be pursuing, while simultaneously creating unreliable revenue sources that are ill-suited for funding the government in the long-term.