03/23/2012 02:39 pm ET Updated May 23, 2012

The Intrusion of Government in the Prescription Drug Market

When picking up a prescription, trust the advice of your pharmacist and read the fine print on the package insert. It may contain useful information and help you prevent a side effect. The same advice should be followed when looking at proposed legislation that promises only benefits, with no side effects. Hopefully, this lesson was learned recently in New York, when "small business" advocates pushed for a bill that would have raised the cost of prescription drugs for every resident in the state, while doing virtually nothing for the small drugstores that the bill was ostensibly designed to protect. Thanks to the leadership of Governor Cuomo, the legislation that passed was not nearly as damaging to small businesses as it could have been.

The legislation that was initially proposed in New York would have required the managers of insurance plans to let their clients use local pharmacies to fill prescriptions that had previously been filled by mail order. The lone prerequisite for allowing the switch was that the price of the drugs must be "comparable," a vague and misleading word.

The problem is that these small pharmacies cannot compete with large mail order pharmacies, which can buy drugs in such massive quantities at lower cost and then pass on the savings to their customers. For those who take medication for a chronic condition like high blood pressure or diabetes, the mail-order pharmacies are able to drive down drug costs for plans and consumers. Local pharmacies remain necessary for medication needed for immediate short-term treatment like antibiotics for infections or to relieve an allergy.

Drafting a law that will send customers from the most efficient and low-cost option to a more expensive choice drives up the cost of prescription drugs for everyone. The New York bill effectively created a tax that would increase the cost of prescription drugs by as much as 10 percent, according to industry estimates.

The vast majority of consumers -- 85 percent -- buy their prescription drugs over the counter, either from an independent store, a supermarket or a national chain. Those national stores -- like Wal-Mart or Walgreens -- already account for 55 percent of total sales. Conversely, only seven percent of all prescription drugs are purchased by mail-order. But, these mail order sales are important to those who take medication daily because they lower the price of every dose to those paying the bill, consumer and insurers.

These facts were not enough to dissuade the New York State legislature. They were apparently persuaded by the false premise that this was good for small "mom and pop" pharmacies, even if the proposal was at the expense of the rest of their constituents. These lawmakers heard testimonials from small independent pharmacy owners that mail-order providers -- who, remember, have just seven percent of total sales -- were driving them out of business. They were asking New York to step in and stop consumers from getting the best deal on their behalf. In June of 2011, the bill passed by a combined vote of 203 to 4.

Fortunately, others took notice of how bad the bill was for both consumers and fair competition in business. Opposition came from anyone who took the time to read that fine print, including the Federal Trade Commission and the Business Council of New York. The New York Times editorial page urged Governor Andrew Cuomo to veto the bill, saying it, "looks more like a favor to retail drug lobbyists that could actually drive up costs for consumers."

Much credit goes to Governor Cuomo, who rightly brokered a last-minute compromise to ensure that the people buying the drugs wouldn't be hit with higher costs. The governor got rid of the vague "comparable" clause, meaning pharmacies would have to offer the same price as mail order drug providers.

New York has been the "bellwether" state on this issue and Governor Cuomo exerted leadership in keeping drugs affordable. This matters nationally as the pharmacy lobby brings legislation to a statehouse near you, with the promises of "consumer choice" and "protecting small business." If your legislature is fooled into believing this, and your governor doesn't amend a popular bill to protect consumers, the new law will drive up your prescription drugs costs.

Furthermore, it is important to note that the final product in New York did little to help the small independent pharmacies it was supposed to protect. Those stores simply cannot purchase prescriptions drugs in the volume necessary to get the sameprices as larger purchasers, nor can they meet the health standards set forth by the law. They simply cannot fill a prescription at the low price that a mail order pharmacy offers. Whatever percentage of the prescription drug market that is diverted from mail-orderwill largely be served by large retail chain stores at higher price.

The lesson in New York is that you need to read the fine print. If you're hearing the standard rhetoric that something is "good for small business," there's a good chance it actually isn't, and an even better chance that it's bad for you.