Fiona Scott Morton Testifies before Senate Finance Committee Hearing on Prescription Drug Prices

Professor of Economics Fiona Scott Morton testified in front of a hearing of the Senate Finance Committee devoted to the topic of “Prescription Drug Pricing and Negotiation: An Overview and Economic Perspectives for the Medicare Prescription Drug Benefit” on January 11, 2007.

Whether the federal government should be able to negotiate lower prices for prescription drugs under the Medicare prescription drug benefit was a prominent issue in the 2006 congressional elections, and is now one of the first issues to come before the new congress. The Democratic leadership in the House of Representatives planned to propose a bill as part of its “100 Hours” agenda requiring that the Department of Health and Human Services conduct such negotiations.

In her prepared testimony, Scott Morton outlines the economics of prescription drug research, development, and production. Decisions about Medicare policy are critical, she says, in part because, “[T]he public pricing scheme used to pay for drugs invented and developed in the private market will strongly affect the level of innovation in the industry.” She also considers the dynamics of consumer behavior in the prescription drug market.

Scott Morton goes on to analyze particular elements of the Medicare prescription drug policy and potential changes to it. For example, she looks at the effects of regulating the prices of new, breakthrough drugs. “While the manufacturer may charge a high price for this drug, it could be even more costly to regulate this price. If there is any kind of innovation our society wants the most, it is breakthrough innovation, rather than another drug that is similar to something we already have. Therefore, paying innovative manufacturers high prices provides an incentive for venture capitalists and entrepreneurs to work hard to find the next breakthrough drug. I am very hesitant to recommend regulating the prices of these drugs. In addition, at the moment these drugs do not seem to be a large component of expenditure.”

Read Scott Morton’s full prepared testimony.