Americans are concerned about rising drug prices, and they want Congress to do something about it.
According to the Kaiser Family Foundation, one of the most popular proposals (garnering the support of 83 percent of Americans) is giving the federal government power to “negotiate” with drug companies to get lower prices for medications for people enrolled in Medicare.
Government “negotiation” over Medicare drugs has been a staple of “liberal” and “progressive” politicians for years.
President Barack Obama and Sen. Amy Klobuchar, D-Minn., have supported the idea. Most recently, Sen. Bernie Sanders, I-Vt., announced a proposed bill to make such “negotiations” happen.
In other words, this is tired old stuff.
The Private Market Wins Over Government Price Fixing Schemes
Here’s the truth. Medicare drugs are offered through a system of competing private plans. Congressional advocates of this proposal would substitute an inferior government “negotiation” strategy for the superior private market negotiations that set Medicare’s drug prices today.
Private contract negotiations have a stunning record of success in controlling Medicare’s prescription drug costs. The nonpartisan Congressional Budget Office (CBO) reports that since the Medicare drug program’s inception in 2003, Medicare’s total drug costs have been 50 percent below original projections.
In federal health policy, nothing comes even close to that performance.
Not surprisingly, seniors have benefited enormously. The Medicare Payment Advisory Commission reports that, over the period from 2011 to 2015, Medicare drug premiums overall have been stable at about $30 per month, and for basic coverage in the stand-alone prescription drug plans, average enrollee premiums have decreased by 14 percent. Moreover, Medicare provides low-income seniors enrolled in private plans direct financial assistance to reduce or eliminate their premium costs.
Liberals in Congress say they want to cut the prices below these market levels, and they think they can do so through government coercion. Ordinary Americans should be disabused of the notion that liberals in Congress are interested in anything that even vaguely resembles the kind of give-and- take “negotiating” that routinely takes place in normal market transactions.
In fact, government doesn’t negotiate medical prices; it fixes them. This is an exercise in power, not persuasion. When the government fixes prices, the government excludes the companies that do not or cannot accept the fixed government prices from participating in Medicare. That means that all seniors would not get Medicare access to the drugs of those companies.
Today, more than three out of four seniors get their drug coverage from Medicare Part D, and the vast majority of them are satisfied with that coverage.
In their next poll, the Kaiser Family Foundation should ask this question: Would you favor government fixing the price of drugs if it meant that you would have less access to drug therapies than you do today?
Why This Will Hurt Seniors
It would be a good idea to probe the public a little deeper on this.
The evidence is that seniors will not have the same access to the same broad range of drug therapies that they do today.
The CBO examined this issue a few years ago and determined that Medicare can “negotiate” drug prices below the current market, but if—and only if—the secretary of HHS could impose tough sanctions or issue restrictive drug formularies, special and exclusionary lists of drugs that would be available to seniors. Says the CBO:
Negotiation is likely to be effective only if it is accompanied by some source of pressure on drug manufacturers to secure price concessions. The authority to establish a formulary, set prices administratively, or take other regulatory actions against firms failing to offer price reductions could give the Secretary the ability to obtain significant discounts in negotiations with drug manufacturers.
But we don’t have to guess the outcome.
The Veterans Administration program is often cited as “The Model” for government drug “negotiation.” In a 2013 study, the Lewin Group, a top econometrics firm, found that Medicare Part D has broader drug coverage than either the Federal Employees Health Benefits Program (FEHBP) or the Veterans Administration (VA) health program.
They found that of the top 274 drugs covered under Medicare Part D, 254 (91 percent) were available through the FEHBP formularies, but just 215 (78 percent) were available through the Veterans Administration formularies. Not surprisingly, an earlier Heritage analysis found that roughly two out of five Medicare-eligible VA patients got their prescriptions through Medicare Part D, not the VA.
Real market competition best controls costs. And, as the CBO has also found, expanding that competition beyond the provision of prescription drugs to all of Medicare, through a similar defined contribution system (“premium support”), can control costs for seniors and taxpayers alike. Old-fashioned price fixing is exactly the wrong prescription.