The House is expected to vote today, without any hearings or serious debate, to approve a measure that would allow the federal government to intervene in drug price negotiations for Medicare. But attention already has shifted to the Senate, where more thoughtful consideration may be possible.

The spotlight is on the leaders of the Senate Finance Committee, which held hearings on the issue yesterday.

  • Sen. Charles Grassley (R-IA) set the stage with an eloquent and thoughtful speech to his Senate colleagues on Wednesday.

    He gets to the heart of the debate over how price “negotiations” actually work at the Department of Veterans Affairs: The “government passed a law to guarantee itself an automatic discount no one else can get. By law, that price is automatically 24 percent less than the average price paid by basically all non-federal purchasers. Nice negotiating tactic, pass a law and guarantee yourself a discount,” he explained.

    Does anyone doubt that this is where the new policy would lead?

  • After the Finance Committee hearings, Chairman Max Baucus (D-MT) issued a statement that shows he clearly needs to think about this some more. One part praises the success of Part D so far and says: “I see nothing that warrants heavy-handed intervention in this market. We should proceed cautiously with any legislation?”

    “?But we should proceed nonetheless.”

    Sen. Baucus continues: “The ‘noninterference clause’ in the original Medicare Modernization Act is prohibiting us from pursuing constructive efforts to make the benefit work better for seniors. The total prohibition on negotiation should be eliminated.”

    And then he concludes: “Price controls and national formularies are clearly not the answer.”

    But that is exactly the road that government involvement in drug pricing would take! More hearings clearly are needed.

It’s impossible to report here on all of the excellent articles and papers that have been produced to help educate the debate so we have prepared a Resource Guide with links to many of them.

Please note, in particular, the Fact Sheet we prepared, called “Medicare Part D and Prescription Drug Prices,” that was a joint project of eight think tanks. (This updated version has some additions from the one I sent you last week.)

As HHS Secretary Michael Leavitt wrote in a Washington Post article on Thursday, “The success of the Medicare prescription drug benefit provides strong evidence that competition among private drug plans has contributed significantly to lowering costs. The average monthly premium has dropped by 42 percent, from an estimated $38 to $22 — and there is a plan available for less than $20 a month in every state. The net Medicare cost of the drug program has fallen by close to $200 billion since its passage in 2003.”

Price negotiation is taking place with the new drug benefit in Medicare every single day by private plans who know what they are doing and are producing dramatic results. Let’s hope that reason ultimately prevails in the Senate. Making policy by political slogan is never good.

President Bush said he will veto the legislation, but let’s hope it doesn’t come to that.


Gov. Schwarzenegger made banner headlines this week in announcing his plan for universal health insurance for the nation’s most populous state.

It involves an individual mandate, an employer mandate, new taxes on hospitals and doctors, a shell game of new subsidies, and a scheme to grab more Medicaid money from the federal government (which anywhere else would be called money laundering), for starters.

Gov. Schwarzenegger instantly ran into a wall of opposition from the many sectors that will be gored by the $12 billion plan:

  • Employers: The plan mandates that businesses with 10 or more employees provide health insurance or pay a fine (equal to 4% of their payroll). This is a jobs tax, pure and simple. And most likely it will be challenged as violating the federal ERISA law which exempts employers who self-insure from state health insurance laws.

  • Individuals: The plan has an individual mandate directed at more than 6.5 million uninsured Californians – citizens and non. The governor calculates there will be significant savings to the system by eliminating these “free riders.” But they will face the long arm of the law to force compliance and will be required to present an insurance card whenever they need medical treatment. (Figure out how that is going to work with the Emergency Medical Treatment and Active Labor Act that requires public hospitals to provide treatment whether people are insured or not.)

  • Taxpayers: California’s publicly-financed Medi-Cal and Healthy Families programs will be expanded to cover children well into the middle income range – those in families earning up to $60,000 a year.

  • Health plans: The governor would micromanage how health insurance plans could operate, dictating how much they must spend on what and who they must sell policies to and under what circumstances, surely driving up the cost of policies.

  • Doctors and hospitals: And, while the governor promises increased Medicaid payments to doctors and hospitals, he then would tax them at the rate of 2% for physicians and 4% for hospitals for the privilege of delivering their services. (This is where the money laundering comes in – boosting payments to doctors and hospitals to snare more federal matching Medicaid money, then getting at least some of the original money back from the providers through new taxes.)

    Bob Helms of AEI has a terrific new paper analyzing the fundamental flaws in Medicaid financing, described in the articles section below.

We could go on about the problems with the California plan. But there are some good ideas: The plan says that the minimum mandatory health insurance need have only a $5,000 deductible with a maximum out-of-pocket of $10,000 for families. (But how long do you think high-deductible policies will last when the state legislature gets involved?) Also, there would be a new state-run purchasing pool for heath insurance. And the plan would allow state tax-deductibility for contributions to health savings accounts.

Schwarzenegger’s detailed 10-page description of the new plan will quickly turn into 1,000 pages of legislation and many more thousands of pages of regulations, suffocating a health care system that is working about as well as can be expected under the circumstances. If you go to, you could find a $1,000 deductible policy for a family of four in Carmel, California, for example, for about $225 a month.

The governator relied heavily on the Massachusetts model and suffers from the same overreach. To quote Tom Miller of AEI appearing on CNBC: “It’s a heavy lift, and Arnold’s muscles aren’t what they used to be.”

What should the state do? Pare down the plan. Get the government out of the way and encourage even more competition among insurers, provide direct subsidies for people to purchase health insurance that they can afford and that is portable from job to job, and lift the burden of regulation so the Golden State can show the rest of the country how this should be done.

Grace-Marie Turner


  • Medicare price negotiations: A resource guide
  • CMS releases U.S. health spending estimates through 2005
  • The Medicaid Commission report: A dissent
  • Market initiatives to improve access to health insurance
  • States to expand health coverage
  • Long-term or short-term, public health insurance is not sustainable

Source: Galen Institute, 01/11/07

The Galen Institute has compiled a resource guide that offers a listing of events, papers, and commentaries by health policy experts as well as news articles that educate the debate over government involvement in prescription drug pricing, with links to each item.
Full text:

Source: Centers for Medicare & Medicaid Services, 01/09/07

“Health care spending growth in the United States slowed for the third consecutive year in 2005, increasing 6.9 percent compared to 7.2 percent growth in 2004 and 8.1 percent in 2003,” according to the Centers for Medicare and Medicaid Services (CMS). The 6.9% rate is the slowest increase since 1999. “Growth in retail prescription drug sales decelerated for the sixth consecutive year, increasing just 5.8 percent in 2005, following 8.6 percent growth in 2004 and 10.6 percent in 2003,” according to CMS. Health care spending in 2005 reached almost $2 trillion, representing 16% of the Gross Domestic Product, or $6,697 per person. Medicare spending in 2005 reached $342 billion, while Medicaid reached $311 billion, continuing its recent deceleration.
Full text:

Author: Robert B. Helms
Source: American Enterprise Institute, 01/07

AEI’s Bob Helms, who served as a voting member of the Medicaid Commission, registers his dissent with the Commission’s final report, arguing that it did not fully address Medicaid’s deficiencies, particularly its “ill-conceived” and “outdated” Federal Medical Assistance Percentage (FMAP) program used to determine the amount of federal money given to the states. Helms finds that “data for all states reveal that there is a negative relationship between the per-capita amount of federal funds flowing to the states and the amount of poverty in the states – that is, as a general tendency, the poorer the state, the less federal money that state receives.” For example, “States with the highest poverty rates – such as Alabama, Louisiana, and Mississippi – received much lower Medicaid payments per-capita than did wealthier states like New York and several New England states.” Helms writes that a better approach “would be to block-grant the program and force Congress to decide how much money it wants to devote to Medicaid compared to all other budget priorities” or to “reform the current FMAP formula to target the poorest and most disabled beneficiaries and to reduce the matching percentage for program extensions beyond current mandatory coverage for those with higher incomes or for optional benefits.”
Full text (pdf):
Final Medicaid Commission report (pdf):

Author: Joseph Antos
Source: American Enterprise Institute, 01/09/07

Testifying before the Senate Committee on Health, Education, Labor, and Pensions, Joe Antos of the American Enterprise Institute provides an overview of recent market initiatives that make health coverage more affordable and improve the functioning of the health insurance market. “The most important recent federal initiatives to promote more efficient and effective use of our health dollars are the enactment of HSAs and the expanded flexibility given to states to reform their Medicaid programs,” said Antos. The Massachusetts health plan has also received much national attention, but while the “plan is a bold initiative that intends to improve the functioning of the private insurance market rather than replacing it with government programs?The high cost of health insurance in the state, exacerbated by state mandates and market conditions, makes achieving that goal a difficult challenge,” said Antos. “Promising ideas include small business health plans and widening access to insurance by reducing disparities in state insurance regulation.”
Full text (pdf):

John Goodman, Ph.D. of the National Center for Policy Analysis also testified at the hearing, providing a defense of consumer-driven health care. “To control the growth rate of health care spending, someone must choose between health care and other uses of money?(a) government (national health insurance), (b) employers and insurers (managed care) or (c) patients in consultation with their doctors (consumer-driven health care).” He explains why the latter approach is the most sustainable.
Full text:

Author: Dennis Cauchon
Source: USA Today, 01/07/07

“States are planning large expansions in health care coverage this year in an aggressive and potentially expensive attempt to reduce the ranks of the 42.4 million Americans who are uninsured,” reports USA Today. “Popular proposals include guaranteeing medical coverage to all children; subsidizing medical insurance at small businesses; and providing tax incentives for businesses and individuals to make coverage more affordable,” writes USA Today. “Behind the surge in activity on health care: States have new tools – budget surpluses, more flexible rules and successful experiments in other states,” reports USA Today. “Also, states enjoyed unexpected success in controlling health care costs in 2006, freeing up billions of dollars that had been committed to health care but were never spent.” Jim Frogue of the Center for Health Transformation notes that states “are experimenting more with health policy than at any time since the 1980s” and “legislatures are often simultaneously adopting policies that appeal to conservatives and liberals, avoiding the deadlock between Democrats and Republicans in Congress.”
Full text:

Author: Brett J. Skinner
Source: The Fraser Institute, 01/11/07

Government health expenditures have grown faster than the Gross Domestic Product in Canada since 1975, according to a new report from Brett Skinner of the Vancouver-based Fraser Institute. “Government health expenditure has grown faster on average than our ability to pay for it for a long time?We are near the limit of what taxpayers can afford and are facing significant trade-offs including reduced access to the latest medical care – worse than the lack of access already seen in Canada today – and proportionally less spending on other public priorities,” writes Skinner. Possible solutions include “user fees for publicly funded health care; legalizing private insurance for medically necessary health care; and using competition between private (non-profit and for-profit) and public providers for the delivery of publicly funded health care,” concludes Skinner.
Full text:


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:

Can Government Price Negotiation Work for the Medicare Drug Benefit?
American Enterprise Institute Event
Friday, January 19, 2007, 2:00 p.m. – 4:00 p.m.
Washington, DC

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

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