Drug Prices: Renegotiate The Deal

The crying game is an apt description of the melodrama now being played out on the Washington stage, with both the Clinton Administration and the pharmaceutical industry crying foul, feeling betrayed, and acting deeply wounded. The performances could simply be dismissed as bad soap opera, were it not for the importance of the issue at the heart of the dispute--drug prices and the need to curtail soaring health-care costs.

The White House and the Democratic Congress are publicly castigating the drug companies for greed. They say they can prove that, despite strong promises to show restraint, the pharmaceutical industry raised drug prices far above inflation last year. Amid whispers of price controls, the President declared: "We cannot have profits at the expense of our children," in language that was a lot rougher than the words John F. Kennedy used to beat up on Big Steel three decades ago. Drugmakers say the Clintonites are demonizing them for political points. They say they had a deal to keep prices within the consumer price index before getting attacked and humiliated.

So what's really going on? We know that the larger drug companies, speaking for the industry, did strike a bargain with some members of the Clinton transition team. They promised, as they had to Congress earlier in the year, to keep average drug prices from increasing faster than the rate of inflation. In return, the Clinton people said that, once in office, they wouldn't single drugmakers out for price controls, much less public bashing.

Unfortunately, it appears that the two sides spoke past each other by using two different drug-price measures. The Administration and Congress chose to look at wholesale list prices, the prices charged to local pharmacies. These, in fact, did jump far in excess of the CPI. But the drug companies want everyone to look at the average price, which includes the sharply lower discounts negotiated by health-maintenance organizations as well as the much higher list prices. They argue that this average price for drugs was below the CPI, and therefore they are good guys, not bad guys.

Our advice is to end the histrionics and renegotiate the deal. The pharmaceutical industry is one of America's most competitive global powerhouses, and Washington should stop making political hay by beating up on it. The drug companies, in turn, should keep all prices within the CPI for the next two or three years, the time it will take to get managed competition in health care off the ground. Experience shows that bargaining with large managed health plans lowers drug prices dramatically. As more people come under managed-care plans, the industry's gravy train--charging higher prices for individuals who lack the buying clout of groups--is eventually going to come to a dead stop. Best learn to live in that new reality now.

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