POLICY/PHARMA/HEALTH PLANS: Michael Cannon doesn’t understand market incentives

Michael Cannon (sensible libertarian, Cato Institute) has noted that Those Who Sell Out Will Eventually Be Punished.  What he means is that once the pharmaceutical industry did the “deal with the devil” in 2003 for the creation of Medicare part D, it was only so long before real price controls will be instituted by the government. That’s because at some point the seat of power will be inhabited by those working on behalf of constituencies who dislike having their faces ripped off, as opposed to those looting the Federal treasury on behalf of the rippers-off of faces. Now that a mealy mouthed effort at negotiation has been passed by the new Democratic Congress—one that will be quickly vetoed anyway—the first signs of this “punishment” are coming.

Of course he could have said this about 1965. In fact many members of the AMA & AHA said just that at the time and bitterly opposed Medicare. Then they enjoyed 15 years of incredible rising incomes with no efforts to stop them before DRGs et al in the 1980s. And even then their incomes continued to rise for another 15 years, and haven’t rally stopped. So punishment can take a long, long time in coming.

And that is just the point. Who was the MMA passed in aid of? It was passed for the senior management at the companies it benefited—people like Hank McKinnell, Bill McGuire, Larry Glasscock. And what did they see after it was passed? Their stock prices rise when the program cut in for them (04 for United and the managed care cos, 05 for Pfizer and the pharmas) which of course sent the value of their retirement packages go through the roof ($200 mill for McKinnell, $1.6Bn sh for McGuire, I believe). That’s a pretty good market incentive if you ask me! I’m surprised Michael’s one of those Keynsians worried about the long run. After all none of the people “selling out” gave two hoots about it; they believe in the power of market forces.

Of course, there will be a long run, and Michael is kind of right. But it’s not those doing the selling out who will be punished. It’s the successors of McKinnell, McGuire et al who will have some cleaning up to do.

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  1. In the total mix and developing story on MedPartD I think we need a couple of years yet to see who wins and who looses. Unfortunately the healthcare system is designed to produce winners and loosers. I don’t think that over time, with profits being the main driver for corporate health, that patients are going to be the winners. I did a search on MedPartD and came across some things that lead me to believe all will not be rosy for very long.
    “The Medicare prescription drug benefit last year increased U.S. medication sales by $2.5 billion, or 1%, a trend that has contributed to increased earnings for Pfizer and other pharmaceutical companies, according to research company IMS Health, Bloomberg/Philadelphia Inquirer reports. According to IMS Health, purchases last year under the Medicare prescription benefit accounted for one-sixth of the total increase in medication sales. The Medicare prescription benefit last year also contributed to increased earnings for UnitedHealth Group and other health insurers that sold plans to 22.6 million beneficiaries under the program (Bloomberg/Philadelphia Inquirer, 1/20).”
    Another business report said that profits to Drug companies in 2007 may drop for PartD business as insurance companies negotiate better deals. But are those reductions being passed on? The following link says maybe not.
    “Coverage through the “Doughnut Hole” Grows Scarcer in 2007” – http://www.familiesusa.org/assets/pdfs/medicare-donut-hole-nov-2006.pdf
    The link below also tells who’s loosing against PartD insurance companies – small business drug stores. So I guess the question is do we care if corner drug stores fail and will it really matter. I also did not find if the large chains like CVS are doing any better better. But once the market adjusts and finds its way, and companies start jockeying for max control of the market, I think prices will continue to rise.

  2. You may want to check your facts. Pfizer’s stock did not rise in the 2005-today timeframe. At the beginning of 2005 Pfizer was selling for $27.31. It opened this year at $26.15. This doesn’t support your point about the link of Part D passage to the retirement payout for Hank McKinnell. If you want to go back to the time when MMA was passed, your story even gets weaker; Pfizer stock was selling for ~$35. Overall, many things go into Pfizer’s stock price and a good analysis will show that MMA provided perhaps a 1% improvement in bottom line performance for big Pharma.