In many cultures, bargaining is an accepted practice -- when you go to the market, you bargain with the seller over the price of fish, fruit or fowl. In the United States, we usually rely on someone else to bargain for us. When we're buying groceries, electronic toys, or almost anything else, we visit a store where we can get good value for a good price. We know that the vendor buys in large quantities and can use that volume to obtain a good price and pass those savings on to us.
A year ago, Medicare launched a prescription-drug program, which now provides coverage to22 million Americans. Since it buys medications for that many people, it should get a really good price for the drugs it buys. But this isn't what happens. Instead, the program's structure prevents Medicare from obtaining the best possible prices for prescription drugs, even though high drug costs were the impetus for the benefit in the first place.
Instead of relying on the market power and administrative efficiency of a single large purchaser, the drug program depends on thousands of stand-alone drug plans and HMOs to separately negotiate with each drug manufacturer -- shattering the market clout that Medicare would have brought to bear on prices as the single largest prescription-drug purchaser in the United States.
In fact, when passing the initial Medicare drug benefit law, Congress went even further than simply turning purchasing responsibility over to drug plans and managed-care companies. It prohibited Medicare from "interfering" in the price negotiations between drug-plan sponsors and drug makers and prevented the Medicare program from taking other steps to reduce drug prices. In essence, Congress left Medicare without the power to do much about high or unfair drug prices.
Last week, the Democratic-controlled House passed the Medicare drug negotiation measure as part of its first "100 hours" initiatives. The Bush administration had already stated that the president would veto such a measure, arguing that private plans have already obtained low-enough prices from manufacturers. Sadly, this is not the case. The median price difference between what the Veterans Administration pays for frequently prescribed drugs and what Medicare pays for the same drugs is almost 47 percent.
ADVERTISEMENT
One way to strengthen Medicare's ability to get the best prices would be for Medicare to operate its own drug benefit, negotiating drug prices for this program. This option would enable Medicare beneficiaries to enroll in drug coverage through the Medicare program itself, with the confidence that the nation's largest prescription-drug buyer was providing them with the best protection from high costs.
Medicare could also negotiate with manufacturers for better prices on certain types of prescription drugs. When private plans establish preferred drug lists, they secure better prices by favoring one manufacturer's products over others -- but when there are few or no competing drugs, the plans have little leverage. A national buyer could get better results and establish prices for this subset of drugs that would apply to all drug plans and HMOs working for Medicare beneficiaries.
A third option would be to negotiate benchmark prices. As a national negotiator, Medicare could establish discounted prices for prescription drugs; plans and beneficiaries would be guaranteed that they could obtain medications at these prices. But if plans were able to negotiate even lower prices, they would be free to do so.
However it does so, Medicare should take control of drug prices.
Sometimes, it's fun to bargain one-on-one to drive the car salesman crazy, or to engage in the give-and-take of purchasing gifts when you're in a faraway place. But sometimes it makes a lot of sense to let a big purchaser bargain for you. If it were free to bargain, Medicare could cut a better deal for American taxpayers.
We all depend, sooner or later, on breakthrough drugs, the product of hundreds of millions of dollars of investment in research and development. They are powerful weapons against disease. But sometimes, after investing huge amounts of money and enlisting the best efforts of brilliant research scientists, the companies making these drugs fail.
Last fall, for example, after investing more than $800 million in trying to develop a blockbuster drug to combat heart disease, Pfizer Inc. stopped work on torcetrapib. The reason: Some participants in the clinical trials died of complications. Pfizer scientists had hoped this new experimental drug would be a powerful treatment to lower the risk of heart attack and stroke. The good news: The scientists are working to discover what went wrong.
Investment in research and development is the lifeblood of America's pharmaceutical industry. Our expectations are well-founded on the performance of America's scientific talent -- and the willingness of investors to take the necessary risks.
ADVERTISEMENT
But House Democrats want the federal government to control drug pricing in the huge Medicare program, which would amount to controlling roughly 60 percent of all drugs sold in the United States. Their rhetoric is appealing: Substitute ostensibly disinterested government "negotiation" for the current bargaining between health plans and drug companies.
Government "negotiation" would mean that government would fix drug prices. The likely method of enforcing the fixed price would be crude: Congress would simply block entry to any company that wouldn't or couldn't accept the government's fixed price, and companies wouldn't be able to sell to seniors in Medicare. That's bad news for seniors who depend on new and more effective drugs sold by companies locked out of the Medicare "market."
There's a lot wrong with the Medicare drug program. But the intense competition that takes place among health plans offering drug coverage today isn't one of them. When the program started, Medicare officials projected that the average monthly premium would be $37; in fact, it declined to less than $24. Private health plans are securing serious discounts, benefits are generous (especially for poor seniors), and eight out of 10 seniors say they're satisfied. Private-sector negotiators are doing a good job, and the nonpartisan Congressional Budget Office doesn't think the Medicare bureaucracy would do better.
Still, House Democrats say that with 38 million beneficiaries enrolled, the government's market "clout" as a pharmacy benefit manager would dwarf the private-sector managers already serving Medicare beneficiaries. That's not the case, however. In 2004 alone, Advance PCS covered 75 million people; Medco Health Solutions covered 65 million, and Express Scripts covered 57 million.
There is, however, one big difference between the Medicare bureaucracy and the private-sector benefit managers: Medicare has no experience managing outpatient drug benefits. Moreover, when government officials do "negotiate" drug prices, it almost invariably means setting a price below the market level, which reduces the supply of drugs or restricts the choice of drugs patients can have. Medicaid routinely restricts access to pharmaceuticals, and the Veterans Administration, often touted as a model for federal drug pricing, also has a restrictive list of approved drugs.
In a recent study for the National Bureau of Economic Research, Joseph Golec and John Vernon, professors of economics at the University of Connecticut, estimate that European drug price controls over the last 19 years resulted in a loss of about $5 billion in forgone research and development spending and 46 fewer medicines.
It's a pretty sure bet that if we make European-style policy choices, we'll get European-style results. You may be spared any anxieties over whether private-sector research scientists will undertake projects worth hundreds of millions of dollars in the risky business of scoring big breakthroughs against diseases. There's a simple remedy: Just take an aspirin, and complain to your congressman in the morning.
Karen Davenport is director of health policy at the Center for American Progress.Robert E. Moffit is director of the Center for Health Policy Studies at the Heritage Foundation.
