Medicare—Let the Market Work

Medicare—Let the Market Work

November 14, 2006

Health care was a key issue in last week's election. Voters cited rising health care costs as their top economic concern when they supported candidates who made health care reform a priority. The "changes in the composition of the House and Senate will have a profound impact on national health policymaking in 2007 and 2008," the health advocacy group Families USA asserts. “Improvements to the Medicare Part D program will receive a tremendous boost when the new Congress convenes in January." During the first days of the 110th Congress, the House likely will vote to "lift the legislative prohibition that prevents Medicare from bargaining with the drug companies to secure lower prices." Taxpayers could stand to "save as much as $190 billion over the next 10 years" if Medicare negotiated prices with drug makers. It is time to let the market forces of supply and demand make drugs cheaper for seniors.

• Medicare should be allowed to negotiate for lower drug costs. "Pharmaceutical companies, like companies in other industries, grant discounts in exchange for volume and market share. It stands to reason, then, that Medicare can get the best prices on prescription drugs by leveraging its group purchasing power—just as Canada, other nations and other large payers in the United States do." The 2003 Medicare prescription drug bill specifically forbids negotiations between Medicare and pharmaceutical companies. Medicare "pays for drugs indirectly, through the private insurers that administer the prescription program—and those insurers typically pay higher prices than government agencies, like the Veterans Administration, that buy medicines directly from drug makers." The prohibition "dilutes Medicare's bargaining position," and the provision's repeal would open up drug prices to the "good old-fashioned free market economics" of bulk purchasing power—something the president and his allies would undoubtedly be for under any other circumstances.
  
  
• The Medicare Part D program has not achieved the low drug prices it could achieve if Medicare were allowed to negotiate. Prices are "significantly higher than the drug prices negotiated by the Department of Veterans Affairs, the Medicaid program for the poor, and foreign governments." (The governments of Canada, Australia, and the United Kingdom all successfully negotiate with pharmaceutical companies.) Tony Snow said yesterday that Part D has "has been incredibly effective in dropping prices far below what people had expected in the first place." But the House Government Reform Committee estimates drug prices could be reduced by another 25 percent or more. The Veterans Administration's experience with negotiation proves its effectiveness.
  
  
• Allowing Medicare to negotiate could help fill the doughnut hole. The savings the federal government would receive from negotiations would be used to "significantly reduce the size" of Part D's infamous "doughnut hole." The doughnut hole is "perhaps the most bizarre and troublesome aspect of the Part D drug program." "After beneficiaries reach their initial limit of total drug expenses ($2,250 in 2006), they have no prescription drug coverage until their total drug expenses reach a catastrophic threshold for the year ($5,100 in 2006). While beneficiaries are in the doughnut hole, they must continue to pay their monthly premiums, although they do not receive any drug benefits. Only after they have spent thousands of dollars of their own money to get out of the hole ($2,850 in 2006), in addition to their monthly premiums, does their coverage resume." In addition, the doughnut hole "financially penalizes sicker individuals who have more substantial drug need" and generates anxiety among seniors with high prescription drug costs.