For the past few years, Michigan seniors have organized regular trips into Canada to buy American-made medicines at substantially less than American-made prices. Now a Metro Detroit entrepreneur is attempting to save them the trouble by opening a store specifically to re-import the pharmaceuticals.
The one thing this loopy situation should make clear is that the high cost of prescription drugs has nothing to do with availability, and everything to do with legal interference with distribution.
Clear, that is, to everyone except the politicians in Washington, where the two houses of congress are debating different plans to provide seniors with prescription drug coverage. Unfortunately, no one has bothered asking what led to sending these medicines on a round trip to Canada in the first place.
Perhaps the most fundamental principle of modern economics is that the cost of any good or service is affected by only two factors – supply and demand.
So if prescription drug costs are to be contained, there are only two choices. Either increase supply or else reduce demand.
Both approaches are possible.
An easy, cost-free way to increase the supply of pharmaceuticals is to permit alternative marketing of new ones. Give manufacturers an option. They could follow the rigorous Food and Drug Administration approval rules. Or they could opt to put a new drug on a fast track to the market in exchange for including a prominent “Not FDA Approved” warning on the label.
This would make at least some new medicines available unburdened by enormously expensive research and development costs. Further, it would put patients and their doctors back in control of balancing risk against cost in selecting treatment options, rather than having a single, no-exceptions standard applied by federal bureaucrats.
And all of this is before even considering the lives of the desperately ill who might prefer to accept the risk of unproven treatments to their chances of surviving the extensive, FDA approval process.
As to limiting demand, it first must be recognized that since there is no magical fount of limitless health care some type of rationing is unavoidable.
Our system uses price as the control mechanism. If you have more money or better insurance coverage, you get more health care.
Other countries have simply disqualified some patients – say, for instance, anyone with certain types of cancer over age 70 – from receiving scarce health care resources at all. Employing an objective cost/benefit analysis, they have concluded that such patients be limited to palliative care so that scarce treatment resources can be spent on those with a better prognosis and longer term prospects. (In point of fact, the real world suggests that “anyone” is an exaggeration; it would be more accurate to say: “anyone who lacks political clout.”)
A less draconian approach to restraining demand would be to merely require consumers to pick up a larger share of the cost of prescription drugs, i.e., increase “co-pays.” Nothing makes people as fastidious about unnecessary purchases or exorbitant prices as having to reach into their own pockets. Having third-party payers like insurers or governments pick up most of the cost is guaranteed to create consumer indifference toward waste. Of course, this approach also requires freeing up markets so that consumers can shop for the best prices. Nothing will be gained if we continue to permit price-fixing monopolies.
Comparisons have been drawn between health insurance and the near universal coverage we have for automobiles. They are misplaced.
Auto insurance is insurance in the original sense of that word, merely indemnifying against catastrophic losses from theft, collision or negligent operation. It is a financial cooperative with numerous subscribers each paying an individually affordable premium in exchange for protection against a rare, but potentially bankrupting, expense by dispersing the risk among them all.
Medical “insurance” has gone way beyond this risk-sharing concept. It has evolved into a health maintenance system, paying for every service and procedure, no matter how routine.
Imagine how high car insurance premiums would be if coverage included the cost of every wheel alignment, oil change and gas fill-up. Then redouble that number a few times over since the incentive for drivers to conserve would have been eliminated.
The way to control the demand for prescription drugs is to return health insurance to its original function – protecting people against catastrophic loss such as might result from extended hospitalization or expensive procedures and treatments (including high-priced medicines when indicated).
In other words, to reduce the cost of prescription drugs, Americans would need to do precisely the opposite of what is currently being proposed.
A universal prescription drug benefit would as someone once observed, “create a system with the efficiency of the Post Office, the compassion of the Internal Revenue Service and the cost-effectiveness of the Defense Department.”
What politicians are really proposing is not to reduce costs but merely redistribute them. The plans being debated in Washington are not insurance. They are welfare schemes. Not only do such “entitlements” inevitably discourage frugality — by further distancing the consumer from the purchaser — they add an expensive and unproductive layer of bureaucracy in the process.
The cure for our ailing health care system is a good, strong dose of American capitalism, not the importation of Canadian socialized medicine.
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More on economic regulation:
- Throwing our money down a rabbit hole
- Government as venture capitalist
- Wholesale whining
- Michigan’s titanic business climate
- Downtown disaster areas
- Time to give workers the right
- Brave new diversity
