In a January 10 column written for the conservative Independence Institute -- a version of which was reprinted January 21 in The Pueblo Chieftain -- senior fellow Linda Gorman labeled as a “fairy tale” the claim “that the federal government will do a better job than the private sector in negotiating low prices for Medicare drugs.” Gorman made her assertion two days before the House of Representatives sent to the Senate H.R. 4 (“Medicare Prescription Drug Price Negotiation Act of 2007”) as part of Democratic Speaker of the House Nancy Pelosi's (CA) package of legislation passed during the first 100 hours of the 110th Congress. In her column, Gorman misleadingly associated the setting of price caps with price negotiation, when only the latter is part of the House-passed legislation. Gorman also failed to note that H.R. 4 would not authorize the government to establish a formulary for Medicare.

As an example of “how the American government creates a consumer hell via price negotiation,” Gorman cited the Vaccines for Children program enacted in 1993:

In 1993, Hillary Clinton's Vaccines for Children program was set up to buy children's vaccines from manufacturers and provide them to Medicaid clients and the uninsured free of charge. To ensure low prices, the program legislation capped the price of the three vaccines then in use.

The price controls did what price controls always do, they created a shortage. As a 2005 Department of Health and Human Services budget brief pointed out, “The price caps [were] so low, however, that the tetanus vaccine was removed from the Vaccines for Children program in 1998 when no vender would bid on the contract.”

The fact that no bids were submitted should have given the government a clue that its price offers were below production costs. But the government doesn't have to answer to consumers, so for seven years tetanus boosters were not available to children dependent on the Vaccines for Children program.

However, Gorman failed to note that, contrary to her suggestion that “price controls always ... create[] a shortage,” a 2003 report by the Institute of Medicine (IOM) noted that "[v]accine companies do not always bid the maximum price of the cap." The report listed several vaccines subject to price caps -- among them Haemophilus influenza type b (Hib), IPV, and adult pneumococcal -- that did not experience supply problems during the 2001-2001 study period.

Gorman cited the 2003 IOM report and quoted it out of context to conclude that “the government's myopic focus on low, low prices likely destroyed the U.S. vaccine industry”:

A 2003 report from the Institute of Medicine on vaccine finance reported that the number of vaccine producers licensed for the U.S. market fell from 26 producers in 1967 to four producers in 2002. Factors cited for the decline included more stringent regulation, concerns about tort liability and “poor returns on investment.”

In short, the government's myopic focus on low, low prices likely destroyed the U.S. vaccine industry.

The phrase “poor returns on investment” occurred in a passage explaining the concentration of vaccine producers “from the mid-1960s through the early 1980s” -- well before the CDC's introduction of price caps in 1993. Moreover, in discussing “the effect of economic factors on the withdrawal of vaccine products that are viewed as unprofitable or yield low returns relative to the production of pharmaceutical products,” the report noted that "[i]n some cases, demand for older vaccines is not strong enough to warrant continued production." It also noted in a footnote the case of a producer of a vaccine for Lyme disease that “pulled out of the market because of inadequate product demand,” not government-induced or government-mandated low price.

Gorman also cited an October 2005 study by Frank Lichtenberg for the conservative Manhattan Institute on the Veterans Administration National Formulary, which purportedly demonstrated that "[g]overnment focus on price also harms patients by denying them drugs," as a further argument against “direct government negotiation for Medicare drugs”:

A Manhattan Institute publication by Columbia University professor Frank Lichtenberg shows that after the imposition of the Veterans Administration National Formulary in 1997, VA patients were less likely to be prescribed new drugs than patients in the rest of the U.S. health care system.

Lichtenberg notes that veterans' life expectancy “increased substantially before the National Formulary was introduced (during 1991-1997) but did not increase, and may even have declined, after it was introduced (1997-2002). The life expectancy at birth of all U.S. males increased after as well as before 1997.”

People advocating direct government negotiation for Medicare drugs apparently think low prices are more important than anything else. Medicare beneficiaries, who know how important a wide choice of medications is to their health, might beg to disagree.

If allowed to, they would likely prefer to stick with the successful private system, possibly paying a little more now to ensure that the drugs they need will be available in the future.

Gorman's assertions failed to address the fact that H.R. 4 would not authorize the government to establish a formulary for Medicare. Indeed, the inability of the Secretary of Health and Human Services to establish a formulary is one of the reasons cited by the acting director of the Congressional Budget Office (CBO) in a letter regarding a disputed CBO study regarding H.R. 4 in which he maintained that the secretary “would lack the leverage to obtain significant discounts in his negotiations with drug manufacturers.”

From Linda Gorman's guest column, “Medicare-negotiated prices lead to shortage of prescription drugs,” in the January 21 edition of The Pueblo Chieftain:

The latest fairy tale floating out of Washington claims that the federal government will do a better job than the private sector in negotiating low prices for Medicare drugs. Backers rely on the Costco Fallacy to support their case. It asserts that big buyers always get the best prices.

[...]

To see how the American government creates a consumer hell via price negotiation, one need only look at the federal government's attempt to purchase children's vaccines.

In 1993, Hillary Clinton's Vaccines for Children program was set up to buy children's vaccines from manufacturers and provide them to Medicaid clients and the uninsured free of charge. To ensure low prices, the program legislation capped the price of the three vaccines then in use.

The price controls did what price controls always do, they created a shortage. As a 2005 Department of Health and Human Services budget brief pointed out, “The price caps [were] so low, however, that the tetanus vaccine was removed from the Vaccines for Children program in 1998 when no vender would bid on the contract.”

The fact that no bids were submitted should have given the government a clue that its price offers were below production costs. But the government doesn't have to answer to consumers, so for seven years tetanus boosters were not available to children dependent on the Vaccines for Children program.

As is so often the case when people depend on government for health care, the children mattered only when the cameras were rolling. Once the program was enacted they were out of sight, out of mind, and out of luck.

The problem is that bureaucrats see budgets, not patients. Large swathes of the political and health policy establishment both loathe private business and have little understanding of what it takes to make real products.

By 2002, the VFC program was purchasing slightly more than 40 percent of U.S. pediatric vaccines. Its focus on low prices likely helped destabilize long-term vaccine supplies by eroding profit margins. When profit margins are low, firms move scarce capital to other, more highly valued uses. Production facilities do not get repaired, replaced, or upgraded. When current plant and equipment wear out, producers simply exit the market.

A 2003 report from the Institute of Medicine on vaccine finance reported that the number of vaccine producers licensed for the U.S. market fell from 26 producers in 1967 to four producers in 2002. Factors cited for the decline included more stringent regulation, concerns about tort liability and “poor returns on investment.”

In short, the government's myopic focus on low, low prices likely destroyed the U.S. vaccine industry.

Government focus on price also harms patients by denying them drugs.

A Manhattan Institute publication by Columbia University professor Frank Lichtenberg shows that after the imposition of the Veterans Administration National Formulary in 1997, VA patients were less likely to be prescribed new drugs than patients in the rest of the U.S. health care system.

Lichtenberg notes that veterans' life expectancy “increased substantially before the National Formulary was introduced (during 1991-1997) but did not increase, and may even have declined, after it was introduced (1997-2002). The life expectancy at birth of all U.S. males increased after as well as before 1997.”

People advocating direct government negotiation for Medicare drugs apparently think low prices are more important than anything else. Medicare beneficiaries, who know how important a wide choice of medications is to their health, might beg to disagree.

If allowed to, they would likely prefer to stick with the successful private system, possibly paying a little more now to ensure that the drugs they need will be available in the future.