Since the New Year began, the political conversation has been all-talk-all-the-time about prescription drug prices. The idea that the government should negotiate prescription drug prices is a key piece of the reform agenda for the new Congress. Legislation has already been introduced.
At first glance, this seems like a no-brainer. What could possibly be wrong with government negotiating prices? After all, aren’t negotiations part of free markets and healthy competition?
Unfortunately, no — not when one party is the federal government.
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.
But, many will argue, the government negotiates drug prices at the Department of Veterans Affairs — and look what a great deal the VA gets. But if we look carefully, the VA doesn’t get such a good deal after all — especially when it comes to giving veterans access to the most cutting-edge medicine.
Columbia University Prof. Frank Lichtenberg, in a paper published by the Manhattan Institute, found that only 38% of the drugs approved by the Food and Drug Administration in the 1990s and 19% of the drugs approved since 2000 are on the VA national formulary.
The only way that negotiation works is for buyers to be able to walk away from the table if they don’t get their price. That’s what the VA does, and the result is significantly reduced access to new drugs.
The other problem with letting the federal government negotiate drug prices is that it will open the door to price controls throughout the health sector. This will be particularly harmful to the drug industry, which thus far has largely escaped the heavy hand of government in regulating prices.
Price controls inevitably lead to scarcity of supply, reductions in quality, dampening of innovation — and usually all of the above. A good case could be made that the prevalence of price regulation over physicians’ fees and hospital charges, with the accompanying mountains of paperwork to justify their charges, is eroding the quality of American medicine. And it certainly is restricting access to physicians for Medicaid beneficiaries and for many seniors on Medicare.
After experiencing choice in the new Medicare Part D program, seniors will be loath to tolerate such restrictions. The Kaiser Family Foundation conducted a survey that showed 85% of Americans support allowing the government to negotiate prescription drug prices for the Medicare program. But a Dutko Research survey shows that support drops to 30% when people learn that it would mean they could choose only from a list of government-approved drugs.
Moreover, experts at both the Congressional Budget Office and the Office of the Actuary at HHS have said that government involvement in price negotiation will not lead to lower costs for taxpayers. But it would very likely lead to significant restrictions in access to drugs for seniors.
The government would have a hard time beating the incredible results that the private plans negotiating drug prices for Medicare already have produced.
Competition among the plans and choices for seniors have produced significant savings for seniors — with average monthly premium prices for the basic Medicare drug benefit down more than 40% from the $37 a month that was originally projected. This year, the average premium is $22 a month, with premiums actually falling from last year?s $24 average.
On top of all that, Part D is saving money for taxpayers, too. Its cost in the first year alone was an estimated $13 billion below projections.
When was the last time a government program ever came in under budget?
Part D is a unique benefit. It’s a government program that has been successfully integrated with the private sector. And it’s working better than anyone ever anticipated. The program should be allowed to continue flourishing without government interference in price negotiations.
Grace-Marie Turner is president of the Galen Institute, a non-profit research organization focusing on free-market solutions to health reform. She can be reached at P.O. Box 19080, Alexandria, VA, or at firstname.lastname@example.org.