Brian McNicoll: Learn the Lesson From Minnesota: Price Controls Don’t Work

During the negotiation of the Medicare Modernization Act in 2006, Rep. Henry Waxman introduced a proposal to cap premiums for Medicare Part D at $41 per month. This proposal was rejected due to concerns that insurers might offer a low entry rate and then raise rates to unaffordable levels. Premiums opened at about $22 per month on average and stand at about $32 today, saving Americans billions of dollars.

The Medicare Modernization Act forbids the federal government from being involved in drug negotiations, and thus Part D expenditures are down about a third from projections. This has made Part D a government program that does its job for less than expected, allowing drug makers to be incentivized to create new and better products, and saving or giving millions of Americans a better quality of life. However, some big health insurers are calling for price restrictions on prescription drugs in Minnesota legislation (HF 17 and SF 168), ignoring the lessons of Part D.

The proposed Prescription Drug Affordability Board would have the authority to set an upper limit at which insurance companies would have to pay if the board determines a drug is priced too high, effectively disincentivizing competition that creates lower prices. This is troubling because wholesale acquisition costs, which is a list price and does not accurately represent what patients actually pay for drugs, will be compared and fixed. This will make Minnesota’s drug program significantly more expensive.

Minnesota’s third-largest expenditure will increase if these price restrictions on prescription drugs are implemented. There are conflicts of interest in the lobbying for these proposals. The cosponsors for the Minnesota legislation are either working or have worked for organizations that are involved in the selling of these pharmaceuticals or their competing entities that cover the costs. For instance, Rory Witthuhn, senior director of actuarial consulting at United Health Group, one of the state’s largest health insurance vendors, is the husband of the state representative who led the hearing on the legislation in the House Commerce Committee.

The proposed legislation seems to be catered towards the competing interests of insurance companies instead of benefiting the people. In addition, the increased expenditure will also mean an immense rise in the cost of the state budget. Advocating or implementing fixed prices without considering actual costs, as in the case of Minnesota, has repeatedly proven to be ineffective and more expensive in the long run.

Price controls reduce benefits to patients and increase costs to taxpayers. It is important for lawmakers to place the interest of the people they represent first, and cater to their actual needs instead of the entities that fund them.