The Consequences of "Negotiation"

Within the next few weeks, the Senate is expected to vote on whether to allow the federal government to negotiate prices for prescription drugs offered through the new Medicare drug program. The House already has passed a similar bill that advocates say would bring lower drug prices to seniors.

That sounds nice, doesn’t it? Who in the Senate could possibly be opposed to “negotiations” and “lower prices”?

Well, hopefully someone.

Why? Because as soon as you cut through the feel-good rhetoric, the proposal turns out to be a pretty raw deal.

When Democrats passed the Medicare Prescription Drug Price Negotiation Act of 2007 a few days after they took control of the House, they stressed the word “negotiation” in the hopes of making government-mandated price controls sound more palatable.

But unlike a private company, the government doesn’t negotiate prices; it dictates them.

When was the last time your physician ever negotiated his or her payment rates with Medicare or Medicaid? It doesn’t happen. Government sets a price and that’s it.

Independent actuaries from the Congress and the administration have concluded that government involvement in drug pricing won’t lead to lower costs, and it could lead to significant restrictions on access to drugs for seniors.

A quick look at the past tells us that if the government meddles in the pharmaceutical marketplace, the fallout will be immediate and significant.

In 1993, the Clinton administration proposed a plan to control prices of so-called breakthrough drugs. These are the leading edge drugs that usher in new generations of medicines.

It’s no surprise that the next two years saw substantial declines of almost 60 percent in the growth of pharmaceutical companies’ research and development budgets. Just as tellingly, in the years following the Clinton plan’s defeat, their research budgets surged right back to previous levels.

In other words, when the government gets its hands on drug pricing, drug creation takes a hit. When it gets out of the way, research rebounds.

Some advocates of negotiations point to the government’s mass-purchase several years ago of the anti-anthrax drug Cipro as an example of how the government can use its bulk buying power to obtain good deals. But this example is terribly flawed. The government was stockpiling this one drug in case of a national bioterrorist attack. It was not purchasing the drug for routine use by millions of people over time.

If anything, the Cipro story illustrates why government negotiations are tantamount to price controls. At the time of the Anthrax attack, Cipro was retailing for just over $4.50 a pill. The government negotiated a price estimated to have been around 95-cents a pill. But it wasn’t a negotiation at all. The government simply threatened to violate Bayer’s patent rights and allow other manufacturers to reproduce the medicine if Bayer didn’t agree to the lower price.

Who wants to pour $1 billion into developing a new drug when the government might yank away your property rights at any moment?

Supporters of negotiations like to talk about providing “quality health care,” yet what they’d create is something quite different — intrusive, costly government interference that could stifle new drug development.

Democrats in Congress are anxious to make a difference with their new power. But they should heed the physicians warning to “First, do no harm,” either to patients or to the nation’s medical supply.

Nearly 40 million people currently are enrolled in the new Medicare drug benefit. Seniors are able choose from among private competing private plans that negotiate fiercely with drug companies to get the best prices on drugs and offer the most attractive benefit packages.

Beneficiaries overwhelmingly like the way the new drug benefit currently operates. Several surveys put satisfaction with the program above 80 percent. And seniors are saving money: prices of the drug benefit have gone down by 40 percent over original estimates.

Competition works. Price controls don’t. Let’s hope the Senate proves it is the wiser body in listing to reason, not rhetoric.

SHARE THIS ARTICLE

About the author

Within the next few weeks, the Senate is expected to vote on whether to allow the federal government to negotiate prices for prescription drugs offered through the new Medicare drug program. The House already has passed a similar bill that advocates say would bring lower drug prices to seniors.

That sounds nice, doesn’t it? Who in the Senate could possibly be opposed to “negotiations” and “lower prices”?

Well, hopefully someone.

Why? Because as soon as you cut through the feel-good rhetoric, the proposal turns out to be a pretty raw deal.

When Democrats passed the Medicare Prescription Drug Price Negotiation Act of 2007 a few days after they took control of the House, they stressed the word “negotiation” in the hopes of making government-mandated price controls sound more palatable.

But unlike a private company, the government doesn’t negotiate prices; it dictates them.

When was the last time your physician ever negotiated his or her payment rates with Medicare or Medicaid? It doesn’t happen. Government sets a price and that’s it.

Independent actuaries from the Congress and the administration have concluded that government involvement in drug pricing won’t lead to lower costs, and it could lead to significant restrictions on access to drugs for seniors.

A quick look at the past tells us that if the government meddles in the pharmaceutical marketplace, the fallout will be immediate and significant.

In 1993, the Clinton administration proposed a plan to control prices of so-called breakthrough drugs. These are the leading edge drugs that usher in new generations of medicines.

It’s no surprise that the next two years saw substantial declines of almost 60 percent in the growth of pharmaceutical companies’ research and development budgets. Just as tellingly, in the years following the Clinton plan’s defeat, their research budgets surged right back to previous levels.

In other words, when the government gets its hands on drug pricing, drug creation takes a hit. When it gets out of the way, research rebounds.

Some advocates of negotiations point to the government’s mass-purchase several years ago of the anti-anthrax drug Cipro as an example of how the government can use its bulk buying power to obtain good deals. But this example is terribly flawed. The government was stockpiling this one drug in case of a national bioterrorist attack. It was not purchasing the drug for routine use by millions of people over time.

If anything, the Cipro story illustrates why government negotiations are tantamount to price controls. At the time of the Anthrax attack, Cipro was retailing for just over $4.50 a pill. The government negotiated a price estimated to have been around 95-cents a pill. But it wasn’t a negotiation at all. The government simply threatened to violate Bayer’s patent rights and allow other manufacturers to reproduce the medicine if Bayer didn’t agree to the lower price.

Who wants to pour $1 billion into developing a new drug when the government might yank away your property rights at any moment?

Supporters of negotiations like to talk about providing “quality health care,” yet what they’d create is something quite different — intrusive, costly government interference that could stifle new drug development.

Democrats in Congress are anxious to make a difference with their new power. But they should heed the physicians warning to “First, do no harm,” either to patients or to the nation’s medical supply.

Nearly 40 million people currently are enrolled in the new Medicare drug benefit. Seniors are able choose from among private competing private plans that negotiate fiercely with drug companies to get the best prices on drugs and offer the most attractive benefit packages.

Beneficiaries overwhelmingly like the way the new drug benefit currently operates. Several surveys put satisfaction with the program above 80 percent. And seniors are saving money: prices of the drug benefit have gone down by 40 percent over original estimates.

Competition works. Price controls don’t. Let’s hope the Senate proves it is the wiser body in listing to reason, not rhetoric.

SHARE THIS ARTICLE

About the author