Bigger Than Social Security Crisis
Mr. Speaker, I wish to bring the following article to the attention of my colleagues. This article discusses how the savings from creating a truly competitive market for prescription drugs, as is proposed by the Free Market Drug Act, could…
Mr. Speaker, I wish to bring the following article to the attention of my colleagues. This article discusses how the savings from creating a truly competitive market for prescription drugs, as is proposed by the Free Market Drug Act, could be used to eliminate any projected shortfall in Social Security. The American people demand that we focus our attention on the very real crisis that the soaring price of prescription drugs presents to their daily lives.
[From the Center for Economic and Policy Research, Apr., 2005]
Bigger Than the Social Security Crisis: Wasteful Spending on
Prescription Drugs
(By Dean Baker)
Executive Summary
President Bush started a national debate on the future of
Social Security when he announced his plan for private
accounts shortly after the November election. In order to
promote his plan, he has argued that Social Security faces a
serious long-term funding gap.
It is easy to show that the projected funding gap for
Social Security is relatively minor. The Social Security
trustees estimate that the gap over the program's 75-year
planning period is equal to 0.6 percent of GDP over this
period. The non-partisan Congressional Budget Office (CBO)
estimates this gap at 0.4 percent of GDP. By comparison, the
increase in annual defense spending since 2000 has been equal
to 1.0 percent of GDP, more than 1.5 times the size of the
shortfall projected by the Social Security trustees and 2.5
times as large as the shortfall projected by CBO.
Given the size of the projected Social Security shortfall
it is reasonable to argue that attention should be focused on
bigger problems. One glaring example is the soaring price of
prescription drugs, which is imposing huge costs on both the
private and public sectors. This paper examines the
relationship between the potential savings from creating a
free market in prescription drugs and the size of the Social
Security shortfall.
Specifically, it calculates the savings that the federal
government could accrue in Medicare if drug research was
publicly financed and then the resulting patents were placed
in the public domain, as proposed in the Free Market Drug Act
(FMDA). This would allow prescription drugs to be sold in a
competitive market, like other products. By eliminating
government imposed patent monopolies, drug prices would
decline by approximately 70 percent.
This paper calculates that the savings to the federal
government from having drugs sold in a competitive market
could reach $110 billion annually by 2014. By the end of the
period (in 2080) the annual savings would be equal to 1.2
percent of GDP. The cumulative savings over the 75-year
planning horizon would be $3.3 trillion (in discounted 2005
dollars); this is slightly larger than the $3.2 trillion
Social Security shortfall projected by the CBO. In other
words, if the federal government's savings on prescription
drugs from the FMDA were attributed to the Social Security
trust fund, it would be more than enough to make Social
Security fully solvent over its 75-year planning period.
The enormous potential savings from developing a free
market in prescription drugs should be a powerful argument
for moving in this direction in any case, but the possibility
of using the savings to eliminate the projected Social
Security shortfall could make the policy even more
attractive. Of course, the savings to the private sector from
having drugs sold in a free market would be even larger than
the savings to the federal government.
However, the most important benefit is that the FMDA would
eliminate the incentives that government patent monopolies
create to conceal or misrepresent research findings, as was
recently exposed with drugs like Vioxx and Celebrex. If
research is no longer financed by government patent
monopolies, the perverse incentives they create will be
eliminated. This will lead to better health care, in addition
to much lower drug prices.