The Maryland Public Policy Institute
The 2002 Maryland General Assembly recently considered legislation to lower prescription drug costs by forcing drug manufacturers to pay supplemental rebates for inclusion of their drugs in Maryland's Medicaid formulary. The law's defeat was a blessing because its implementation would have been a curse. Instead of lowering drug prices for the neediest state residents, the price controls imposed by such a law would have put Maryland's hemorrhaging state Medicaid program in intensive care and on indefinite life support.
The Prescription Drug Manufacturer Rebates bill (House Bill 1122) would have established a prescription drug spending control program within Maryland's Medicaid program, made formulary decisions based on the efficacy of each drug and required 10 percent rebates from drug manufacturers. The rebates, negotiated by Maryland's Department of Health and Mental Hygiene (DHMH), would have been added to the fees that federal law requires drug manufacturers to pay states to participate in Medicaid.
The Maryland Senate easily passed its version of the bill, with one of the bill's sponsors, Baltimore County Democrat Thomas L. Bromwell, gleefully stating, "This is extorting the pharmaceutical companies that have been extorting my constituents for the past 20 years." Maryland's attempt to coerce drug companies into providing additional rebates was, truly, statutory extortion.
Most Maryland residents who rely on Medicaid are poor or near poor. Decisions by the DHMH to exclude particular prescription drugs would have harmed those most in need of medical help.
As mentioned above, in order to participate in the national Medicaid program, drug manufacturers must provide states with substantial rebates. If Maryland lawmakers had forced them to pay additional rebates, manufacturers likely would have increased prices for non-Medicaid participants across the state or reduced efforts to develop new drugs. In the first instance, non-Medicaid Marylanders would bear the immediate financial pain. In the second, all Marylanders might share the eventual physical suffering.
Lawmakers in Annapolis need to keep in mind a basic economic truth that both theory and experience have proved: price controls do not work because they increase demand, stifle supply and ultimately lead to rationing. In fact, they invariably worsen any problem they attempt to solve. And given the life-enhancing potential of advanced pharmaceuticals, what Marylander would choose to hand over to Annapolis bureaucrats the decisions on who gets how much of what drug?
History is littered with examples of price control failures. In 1971, President Nixon ordered price controls that resulted in fewer produced goods, an energy crisis and, for good measure, a recession coupled with double-digit inflation. The gas lines of the late 1970s appeared when President Carter subscribed to a failed price control policy of voluntary wage-price guidelines, which also resulted in double-digit inflation. More recently, the blackouts in California resulted in large part from price controls that were intended to make electricity more affordable for consumers.
Would HB 1122 have cured the ills of Maryland's cash-strapped HealthChoice Medicaid program? No; it would have deepened the crisis. HealthChoice budget problems are endemic. Last October, the Medicaid funding shortfall in Maryland reached $150 million, with another projected funding shortfall of $80 million for the fiscal year beginning July 1, 2002. Governor Glendening exacerbated the problems by underestimating the number of HealthChoice enrollees and the amount the program would spend to treat and medicate them. At present, about 800,000 Marylanders lack health care coverage.
As a stopgap measure, the Glendening-Townsend administration will transfer $4 million from three health care regulatory agencies' special funds and another $5 million from the state emergency medical system in fiscal 2003. In assessing the crisis last year, state Senator Christopher Van Hollen (D-Montgomery) said, "We saw this as a major concern last year, and this year we're looking at something even more serious.... It's fair to say the situation is dire."
At the same time, Maryland's mental health system is in grave trouble and spiraling into its own major crisis. CPC Health, Inc., the largest mental health provider in Montgomery County, went bankrupt last year and closed its doors. Granite House Inc., another financially straitened provider, shut down two clinics, abandoning 1,600 patients and prompting Spencer L. Gear, the organization's executive director, to say, "I think people should be viewing this as an emergency."
The conclusion is painfully clear: legislation to extort additional rebates from drug manufacturers would not cure Maryland's ailing Medicaid system. Rather, such legislation would be a sugar pill, a placebo, a deceiver. And as such, it would be dangerous to the physical and fiscal well being of every Maryland resident.
—Christopher B. Summers is President of the Maryland Public Policy Institute