Don't Let the Government "Negotiate" Drug Prices
The new Congressional Democratic majority is forwarding legislation that gives Medicare's overseer, the Center for Medicare and Medicaid Services (CMS), the power to directly negotiate prices for drugs sold to its prescription drug program -- Medicare Part D.
Currently, Medicare provides a subsidy to private drug plans selected by beneficiaries. The plans' providers compete vigorously to enroll eligible individuals. They then negotiate with drug makers for the best pharmaceutical prices on a wide range of medicines. Thus, the Part D drug plan has many elements of the market that exists for most other goods and services. Consumers shop for their best deal. Sellers compete for customers. Sellers negotiate with their suppliers for the products they market since lower cost of goods sold mean higher profits.
How is this real market place in Medicare working so far? First, over 90 percent of Medicare beneficiaries have enrolled in a plan. This includes over 10 million low income individuals with a higher subsidy and low or no premium and/or co-pays. Surveys of those who have signed up show around 80 percent are satisfied with the plan. This figure is over 90 percent for low income beneficiaries. So it is quite obvious that most on Medicare like the program.
Equally impressive is that the projected costs of the program have come in significantly under budget. Program costs over the next ten years are over $100 billion lower than initial estimates. Medicare actuaries attribute 85 percent of this to competition among competing plans. They also estimate that plan premiums are over 40 percent below initial projections. One would think that a program with high satisfaction levels and below budget costs would be considered a winner by lawmakers in Washington.
That assumption is wrong.
Majority Democrats believe that as a single huge buyer, Medicare will be able to obtain better deals for medicines than the numerous private plans currently competing. This logic is popular among many. The logic is something along the lines of a rental car company buying in volume getting a better deal from General Motors than an individual Chevy purchaser. It is appealing but unfortunately it also quite wrong.
To see why we need to understand that the market for many drugs is quite different than other products. If Hertz wants to buy in volume they can pick from GM, Ford and Chrysler. They can also pick a host of different autos from those companies. If GM's quote is too high they can look at Ford's products. On the other side, if GM doesn't like Hertz's offer they can try and sell to Avis. So there is a lot of competition on both sides of the market. The "let Medicare negotiate" argument is based on the correct belief that if there was just one auto rental firm it could get a better deal from auto producers.
The market for drugs does not function like autos. In order to encourage the enormous research and development needed to bring new drugs to the market, the government has given patents to these products. So in that situation the drug company is a legal monopoly. It is much more likely that a host of competing insurers will hold more influence with this type of seller than would Medicare.
Why? The reason is that the insurers who purchase these monopoly products have the threat of simply not carrying the drug in question if they think it is priced too high. We see this in the current offerings by competing plans. Each firm has a different list of drugs because some have chosen not to offer particular medicines. This gives the plans leverage to negotiate with drug firms.
Medicare could attempt to limit the drug list as well. However, if it starts to exclude a drug because of price it simply will be unavailable in the program. Moreover, the political pressure to put drugs on the list will prevent the exclusion of high priced products. The drug companies would then have little incentive to negotiate under this system.
In light of these realities, taxpayers and Medicare beneficiaries would be far better off letting the Part D marketplace work.
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Michael T. Bond, Ph.D., is Director of the Center for Health Care Policy at The Buckeye Institute and a professor in the Department of Finance at Cleveland State University.
