The Right Coast

December 30, 2005
The Bush Medicare Benefit
By Gail Heriot

Ok, maybe we're not on the verge of the Singularity. If so, perhaps it's a pity. But living to be really old is still something I've always rather fancied. And until recently I had taken the optimistic view that great strides might occur in my lifetime that would allow some members of my generation (or perhaps the next) to live significantly longer and healthier lives than the previous generation.

I am less optimistic today. And, perhaps paradoxically, part of the reason is the extension of Medicare benefits to include pharmaceutical products. I'd love to be persuaded that I'm wrong, but I suspect that one of the effects of the program will be to take money out of research and development for drugs designed to extend the ordinary human life span and to put that money into other areas.

Here's how my armchair musings have gone so far: If the average human life span is going to increase significantly, it will be because of a technological breakthrough brought to us by the nice folks in the pharmaceutical industry. Some expensive research project--whether initiated by a large or small player in the industry--will pay off big time. As a result, many of us will be able to live to be 110. Or thereabouts.

But the Bush Medicare benefit will almost certainly result in price controls of some sort. It's inevitable. You can't have a system in which a single behemoth with almost limitless political power buys all or nearly all the drugs for seniors without that behemoth insisting upon paying a price that is below what the price would be under current conditions (in which the pharmaceutical industry players have monopoly power on account of patents and sell their products to a large number of buyers, none of which has the amount of market clout or political power that the United States of America will have when it is acting on behalf of the over 65 set).

The marginal cost of producing another capsule of an established drug is tiny. There's already a lot of political pressure on drug companies to provide their drug at marginal cost or below to those who might otherwise have difficulty paying for it. (And I'm not an opponent of those pressures--at least not in all contexts.) Imagine how much stronger that pressure will be once the new Medicare benefit goes into effect.

The pharmaceutical industry stands to both gain and lose here. On the one hand, pharmaceutical manufacturers will be selling more established drugs than ever, because more seniors will be able (and willing) to pay for more drugs. On the other hand, research and development into new drugs will be riskier. If the United States uses its market clout to refuse to pay more than marginal cost for a pharmaceutical product ... or even if it uses that clout to refuse to pay more than average price for that product, the effect will be to discourage research and development into areas that will most likely be of use to the elderly. Some of that research money will likely go elsewhere--where the possibility of "winning the lottery" by making an important breakthrough is greater.

Of course, these things are complicated, and there is probably a lot that I'm not seeing here. But all this tells me that perhaps I shouldn't wait before I try to write the Great American Novel. Time is nobody's friend.