Losing by ‘Saving’

To help close New York’s $4.4 billion budget deficit, Gov. Spitzer has put prescription drugs on the chopping block. His budget proposal for the next fiscal year would axe drug spending by $172 million from the $1.9 billion otherwise expected.

The governor describes this as a way “to control the cost of government.” In fact, cuts like these simply guarantee that long-term health-care expenses will actually increase. And in the short term, there’s a very good chance that they’ll deny Medicaid patients the medications that would help them the most.

Spitzer’s mistakes start with his claim that drug prices have “increased dramatically.” In fact, the price of prescription drugs has fallen. In 2007, inflation grew by more than 4 percent, while drug prices rose by just 1 percent. So, in real terms, drugs averaged 3 percent cheaper last year than in 2006.

What’s more, drug spending is a small fraction of overall health-care spending. New York’s Medicaid program only spends 5.3 percent of its budget on medicine. So slashing it nearly 10 percent, as Spitzer proposes, would barely dent the deficit.

More important, buying prescription drugs is a good investment. Studies show that spending more on prescription drugs today reduces total spending on health care tomorrow.

A recent paper from the National Bureau of Economic Research (NBER) found that Medicare, the government health-care program for seniors, ultimately saves $2.06 for every dollar it spends on medicines. The main reason: prescription drugs often obviate the need for expensive surgeries.

Another recent NBER study estimated that switching from older, cheaper medicines to newer, more expensive ones reduced non-drug health-care expenses 7.2 times as much as it raised drug spending.

Yet Spitzer’s budget is stuffed with financial incentives for pharmacists and patients to use older, cheaper drugs. It would raise by $1 per prescription what pharmacists get from the state for doling out generics and brand-name drugs in Medicaid’s “Preferred Drug Program.” Patients who take these drugs would see co-payments cut from $3 to $1.

Some of Spitzer’s plans make sense – on paper. His budget expands the state’s Clinical Drug Review Program, which tests whether newer drugs are more effective than their older counterparts. (Results from these tests factor into which drugs Medicaid covers.) And it creates a “physician education program” to give doctors “unbiased clinical information” to balance marketing efforts by manufacturers.

Again, this sounds sensible – if the generic version of an older drug works just as well as a newer medicine that’s still under patent, why use the pricier one?

But these proposals ignore the government’s inescapable conflict of interest here. If its primary concern is cost, it has a strong incentive to push older drugs even if tests show that newer versions work better.

Just look at Britain’s experience with a similar program. In 2001, the British equivalent of New York’s Clinical Drug Review Program concluded that Gleevec, a molecularly-targeted medicine, didn’t treat leukemia more effectively than its older counterparts.

But in 2002, Americans with a rare stomach cancer started taking the new drug thanks to its ability to target and kill cancer cells without attacking healthy cells. It took almost a full two years after US approval for Britain’s drug reviewers to approve Gleevec’s use for those with the cancer. Cost concerns tainted – and trumped – the agency’s scientific objectivity.

If Spitzer’s budget passes, Medicaid patients will become dependent upon Albany’s fiscal swings. After all, those who qualify for Medicaid can’t afford to pay retail prices for prescription drugs. So if Spitzer’s bureaucrats won’t approve the drug a Medicaid patient needs, his or her doctors will have no choice but to prescribe them older, less effective medicine.

Per capita, New York’s Medicaid budget is already the most expensive in the nation. Pinching pennies now by cutting spending on drugs will only exacerbate the state’s bloated Medicaid budget down the road. And taxpayers and poor patients alike will pay the price.

Blaming prescription drugs and their makers may be politically easy, but it’s a foolish, counterproductive way to cut health-care spending. There may well be fat in New York’s health-care budget – but it’s most likely in the areas with strong political support.

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.

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