All Drug Prices, All the Time

Since the new year began, we’ve been dealing with all-talk-all-the-time about prescription drug prices. The idea that the government should negotiate prescription drug prices is a key piece of health care legislation in Speaker Nancy Pelosi’s 100 hour marathon, and the House is expected to debate and vote on the measure next Friday.

It sounds so simple. Since we are in favor of competition and price negotiation, what could possibly be wrong with government negotiating prices?


  • First off, it’s a foot in the door for price controls throughout the health sector, starting with the industry that has still 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.

  • Second, governments don’t negotiate prices; they dictate 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 they get.

    Yet it isn’t such a good deal when you want a choice of drugs, especially new drugs. Columbia University Prof. Frank Lichtenberg, in a paper published by the Manhattan Institute, found that only 38% of the drugs approved by the FDA 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.

  • Third, after experiencing choice in the new Medicare Part D program, seniors will be loathe 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.

  • Fourth — and the list could go on — 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 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 savings for seniors – with average monthly premium prices down 35%, from the expected $37 to $24 a month, and premiums holding steady two years in a row.

    And Part D is saving money for taxpayers – an estimated $13 billion below projections in the first year alone.

This is an important debate, one that opens the door for a serious conversation about the value of competition, choice, and free-markets. The other side may have an advantage with the rhetoric on this one, but our side has the advantage of evidence and history that prove competitive markets work best in helping buyers and sellers get the best price and the best value.

My colleagues from several think tanks and I have been working on a fact sheet which I commend to you with more details to help educate this debate, and I also have an article in today’s Houston Chronicle about the issue (see summary below).

We will continue to look for the opportunities to get our message across in these new debates, and we will make it a Happy New Year!

Grace-Marie Turner


  • Medicare drug benefit is fine as is, Madam Speaker
  • Is Massachusetts a model at last?
  • One company finds a way to control health costs
  • The myth of the big bad drug companies
  • HillaryCare comes back
  • Health policy in 2007

Author: Grace-Marie Turner
Source: Houston Chronicle, 01/04/07

Medicare Part D is ?a rare government program that’s both successful and under budget,? writes Grace-Marie Turner of the Galen Institute. ?Despite this news, Speaker Nancy Pelosi, D-Calif., and the incoming Congress have pledged to ‘fix’ the Medicare Part D drug benefit in the first 100 hours of the new session by directing the federal government to ‘negotiate’ drug prices,? writes Turner. ?Part D represents the first significant initiative to reign in runaway medical spending by restoring personal responsibility and savings incentives to Medicare. In doing so, it shows that government can leverage free-market forces to cut costs while giving seniors more choices?Instead of trying to revamp it, Congress should apply the Part D model to other government programs.?
Full text:

Author: Mark V. Pauly
Source: American Enterprise Institute, 01/04/07

Wharton Professor Mark Pauly weighs in on the Massachusetts health plan and discusses which features should be copied by other states and which would benefit from modification. ?Rather than focus on details of subsidized coverage?the initial focus should be on providing coverage of greater actual value than a given benchmark, leaving plan details to consumers, not special interests or public health experts,? writes Pauly in a paper published by AEI. ?The best way to induce people to accept subsidized coverage, or to ensure that a political mandate is truly effective, is to permit individuals to choose their form of coverage,? he writes. ?Getting decent coverage to almost everyone is a better initial goal than getting perfect coverage to fewer of the uninsured,? he writes. ?States considering a universal health-insurance mandate or major health-insurance coverage expansion should provide more flexibility in the types of plans permitted and greater neutrality in the distribution of subsidies,? concludes Pauly.
Full text:

Author: Daniel Weintraub
Source: The Sacramento Bee, 12/21/06

A Sacramento Bee columnist describes the remarkable results achieved by Safeway, the California-based grocery store chain, after it switched from traditional health plans to a consumer-directed health plan. ?After five years of double-digit increases, Safeway saw an 11 percent decline for the employees who opted into the new plan. And the company passed most of that savings on to the workers in the form of lower premiums,? reports the Bee. ?Counting the premium, the deductible and out-of-pocket costs, the average employee is paying less now than under the old traditional plan? and still has access to preventive care 100% covered by insurance. In 2006, about 44% of the company’s 30,000 eligible employees were in the plan, and Safeway expects 70% to enroll in 2007. ?At a time when nothing else seems to be working to control health care costs, Safeway’s experience is encouraging,? writes the Bee. ?It’s an approach that needs to be explored further and allowed to develop so that we can see if it works over the long term, not smothered before it has a chance to take hold.?
Full text:

The Congressional Budget Office recently published a comprehensive analysis of consumer-directed health plans, including their potential effects on health care spending and outcomes.
Full text:

Author: Richard A. Epstein
Source: The Los Angeles Times, 12/22/06

?Critics?are wrong to portray the nation’s big drug companies as heartless, avaricious behemoths that act in whatever manner they choose and always get their way,? writes Richard Epstein of the Hoover Institution. ?The truth is, the pharmaceutical industry is too heavily regulated? Its big problem today is not that it’s free to run roughshod over the needs of consumers, but that it operates in a hostile and excessive regulatory environment that frustrates sound business decision-making,? writes Epstein. Unnecessarily expensive clinical trials and major liability risks drive up costs and thwart innovation. Further, ?regulatory attacks on the industry’s pricing model, including recent proposals to have the government negotiate rates for all senior citizens covered under Medicare Part D, threaten revenue stream.? Attempts to leverage prescription drug costs through the use of price controls would have ?dire consequences,? concludes Epstein. ?We must be careful not to mistake price controls for a cure when they are in fact a disease. Let our new reformist Congress beware.?
Full text:

Author: Robert M. Goldberg
Source: The Weekly Standard, 12/25/06

The Democrats’ plan to allow federal price negotiations for drugs under Medicare Part D would lead to ?a combination of price controls and restrictions on what drugs seniors can use,? writes Bob Goldberg of the Center for Medicine in the Public Interest. ?Democrats have consistently pointed to the government-negotiated drug prices offered by the Department of Veterans Affairs as a model for what they would do with Medicare Part D?Far from negotiating drug prices, the VA imposes them. Federal law requires companies to sell to the VA at 24 percent below wholesale price. If they won’t, they are banned from selling medicines to Medicaid, Medicare, and the public health service,? Goldberg writes. ?In opposing the Medicare Part D reform in 2003, Democratic senator Patty Murray stated that she ‘was unhappy at the prospect that this plan could tell patients with MS, Parkinson’s disease, and ALS that they can’t get the drugs they need because their plan will not cover them.’? Yet Goldberg points out that Azilect, the newest drug to treat the symptoms of Parkinson’s disease, and Tysabri, a new drug for multiple sclerosis, are not on the VA drug list, though every Medicare Part D plan covers them.
Full text:

Author: Tom Miller
Source: The Washington Post, 12/15/06

AEI’s Tom Miller provides a look ahead at the political agenda for this year’s Congress. Democratic leaders will most likely ?halt, if not reverse, the Republican push for a larger private health plan role within the Medicare program and for less-comprehensive and more cost-conscious coverage in private insurance markets,? writes Miller. ?Don’t expect legislation further liberalizing health savings accounts,? he says. Instead, the spotlight will be on expanding ?the 10-year old SCHIP program, trying to make it an entitlement program for all children, and perhaps extending it to lower-income childless adults.? Miller argues that Republicans ?need to ensure that initial efforts to expand the market share of consumer-friendly, private-sector-oriented agents can succeed?An ardent defense of an imperfect, but improving, vision of consumer-driven health care in both the private and public sectors is vastly preferable to the Democrats’ nostalgic agenda that won’t work.? Further, ?Republican members of Congress should acknowledge that much more remains to be done to convert the rhetoric of consumer empowerment and market competition into the reality of a deeper and more robust array of thriving care options.?
Full text:


Is the Massachusetts Health Plan America’s Next Top Model?
American Enterprise Institute Health Policy Discussion
Thursday, January 11, 2007, 9:15 a.m. – 11:00 a.m.
Washington, DC

For additional details and registration information, go

2007 Outlook: Marketplace and Legislative Trends for the Year Ahead
America’s Health Insurance Plans Audio Conference
Thursday, January 18, 2007, 1:00 p.m. – 2:30 p.m. ET
For additional details and registration information, go

Health Care Reform Summit: Options, Opportunities and Obstacles for Oregon
Oregon Health Forum Event
Thursday, January 18, 2007, 6:00 p.m. – 9:00 p.m.
Portland, OR

For additional details and registration information, go to:

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

If you wish to subscribe to this free weekly newsletter, update your address, or be removed from our list, please send an e-mail message to

The views expressed in this newsletter are the opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors.