The high price of drugs is an issue that politicians flock to like moths to a flame. It makes them feel important as they register their outrage and their determination to do something about it.

But interfering with the free market forces that control our economy is fraught with disaster. Price controls and other government interference in the market usually leads to unintended consequences – like shortages, fewer jobs, or both.

Case in point is what is happening in state legislatures in a vain attempt to control drug prices. The Wall Street Journal editorial board calls attention to the states of Nevada and Maryland where lawmakers are passing bills to punish drug companies without benefitting patients.

Nevada Republican Governor Brian Sandoval vetoed a bill on diabetes medication. The bill passed easily through the legislature and may make a comeback. Here’s what the bill proposed according to the WSJ:

            “The state would have decided what counts as an “essential” diabetes medicine, including insulin and others. Manufacturers would be required to disclose the cost of production and marketing, as well as profits and more. That information is proprietary and hard to calculate, as the cost of medicines is influenced by research and development over many years.”

            “Manufacturers would have to inform the state 90 days in advance of any price increase, which is nothing but a heads up to the folks running the public shaming campaign. Some purchasers would stockpile meds before the price ticks up, which could lead to shortages. The bill requires new disclosures for pharmaceutical representatives, and industry already regulated by the Food and Drug Administration.”

In other words, politicians want to tell these drug companies to reveal their trade secrets and their financial status so the government can tell them how much they are allowed to charge and how much profit they are allowed to make. If allowed to happen, this kind of government interference is likely to lead to fewer manufacturers – which will lead to higher prices!

Competition always leads to lower prices! This tried and true Economics 101 fact is displayed in the following graphic:

An FDA analysis in 2005 revealed that patients pay 94% of the branded price when a medicine has one generic competitor. That falls to about 20% of the price when eight companies are competing for market share. The graphic clearly shows the more companies producing the drug, the lower the price.

The solution to high drug prices is therefore, more manufacturers, not fewer. But the politicians attack the manufacturers, making competition less likely. The state of Maryland recently gave the Attorney General the authority to investigate any generic drugmaker responsible for an “unconscionable” price increase. The WSJ says “the left defines unconscionable as paying money for any health-care product or service.”

They say that generic drugs fill nearly 90% of all prescriptions but account for only 27% of total drug costs. State and federal programs are among the largest purchasers of generic drugs, and in 2015 generics saved more than $32 billion in Medicaid alone. Generic drugs saved Maryland $3.7 billion in 2015.

Increasing the number of generic drug manufacturers has been a problem under previous administrations. That looks to change under new FDA Commissioner Scott Gottlieb who is on a mission to increase the number of companies making generic drugs. Gottlieb is preparing a plan to drive more generic innovation and competition, including streamlining the approval process. Such changes will lower drug prices for everyone, unlike the politicians who try to impose their own solutions.

The burden of carrying healthcare by taxpayers is getting heavier every year. We can thank President Obama for that, even though he promised ObamaCare would “bend the cost curve down” for healthcare spending.

According to Chris Conover, Duke healthcare economist writing in Forbes, by 2025, federal, state and local taxpayers will be financing fully two-thirds of American health care! This is seen dramatically in the graph below:

You won’t get this data from the Center for Medicare and Medicaid Services (CMS) because they do their calculations differently. They report the federal government will pay only 29.7% of health spending in 2026, while state and local government will pay only 10.9%, making a grand total of just 40% of total healthcare spending.

But Conover says they arrive at this low figure by ignoring the literally hundreds of billions of dollars in health-related tax expenditures – the largest of which is the tax exclusion for employer-provided health coverage.

In 2016 alone, the federal government lost over $300 billion in revenues due to such tax expenditures and states/local governments lost an additional $40 billion. By 2025 the federal tax revenue loss alone will exceed more than half a trillion dollars!

Why is this important?

Conover says, “At the margin, each dollar of tax-financed health spending shrinks the economy by 44 cents.” That means when government pays for two-thirds of healthcare and healthcare consumes 19.9% of GDP (the official CMS forecast for 2025), these figures imply we will forego 5.9% of GDP due to tax-financed healthcare.

In other words, we will lose $1.1 Trillion dollars of economic stimulus! That amounts to an expense of about $3,000 per U.S. resident. I’m sure that money would go a long way toward alleviating the financial difficulties of most Americans.

The point of all this is we should be minimizing rather than maximizing the share of health spending funded by taxpayers. Economists call this drag on the economy an enormous “excess burden.” The government should get out of the business of financing the healthcare of the wealthy through Medicare and go to a means-tested system of government support rather than one based solely on age.

Conover says the $300 billion a year tax exclusion could be used to finance a new system of “universal tax credits that would provide everyone with the means to purchase catastrophic coverage but not incentivize people to purchase lavish policies with little cost-sharing or that cover routine care that grown-ups can and should budget on their own.”

Think about this. No one expects that homeowners insurance will pay for mowing the grass nor for auto insurance to pay for gasoline and oil changes. Why do people expect health insurance to pay for routine medical expenses?

If we treated health insurance like homeowners or auto insurance there would be more money saved in taxes and premiums that could fuel the economy and raise our standards of living.

I’ve written recently on the adverse impact of Medicaid on our states (Medicaid – The State Killer). Now it seems it is having an even more alarming impact on the defense of our nation.

At a time when tensions are higher than ever with North Korea, the importance of a strong defense could not be clearer. But although the intent of President Trump is to strengthen our military and our missile defense, the drain on our federal budget by Medicaid is significant.

Senator John McCain (R – AZ) is a strong advocate for military spending since his days as a Navy pilot shot down in Vietnam who spent years as a prisoner-of-war. Yet McCain recently voted against the Senate’s bill to reform ObamaCare that would have dramatically reined in future Medicaid spending. Never has a military hawk’s vote had a more negative impact on the military.

The Wall Street Journal recently called McCain to task for his vote in an editorial. Although Trump has promised to increase military spending, McCain has criticized his defense budget because he believes the increased spending is not enough.

The reality is that the structure of federal spending has changed dramatically since the days of President Reagan in the 1980’s when huge increase in defense spending contributed to the demise of the Soviet Union. Increases in entitlement spending including Medicaid, Medicare, and Social Security have increased from 25% in the 1960’s, to 42% in the 1980’s, to an all time high of 60% today. That leaves much less for the military, whose portion of the budget has dropped from more than 25% in the 1980’s to about 15% today.

As Medicaid spending increases, defense spending decreases. This trend has been getting worse in the last eight years as seen in the graphic below:

This pattern was deliberate by the Obama administration and Trump is trying to reverse the trend. But the key to a reversal is the reform of entitlements and Medicaid is a great place to start. Even though the Senate bill would not have cut a single dollar from current spending, the dramatic ratcheting down of future spending would have given us some control over the budget, allowing for greater increase in defense spending. The Senate bill McCain blocked would have saved as much as $772 billion over 10 years. That would buy a lot of defense!

With the heated rhetoric going back and forth between us and North Korea and nuclear missiles pointed at our shores, not to mention growing conflicts in the Middle East and the War with ISIS, it is imperative that we have a strong military. The key to that initiative is controlling our healthcare spending. It’s time for the grown-ups in Congress to put aside their local concerns and do what’s right for the country. A nuclear war with North Korea makes those concerns pale in comparison.

(My last post, Lowering the Cost of Health Insurance Premiums was very popular. For those of you who would like to learn more, here is a link to Senator Ron Johnson’s CNN interview.)