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The Amazing, Classy, Winning (and Completely Ridiculous) $300 Billion Proposal

February 19, 2016
1:12 pm

It’s a notion we’ve heard a fair amount during the presidential campaign, this idea that Medicare should ‘negotiate’ prescription drug prices.  (There’s a very good reason I put ‘negotiate’ in quotes.  We’ll get to that in a moment.)  The concept reached all new levels of visibility in recent days when the leader in the polls on the Republican side told MSNBC’s “Morning Joe” program, “We don’t negotiate.  We don’t negotiate….If we negotiated the price of drugs, Joe, we’d save $300 billion a year.”

I’m not going to devote this post to litigating the $300 billion boast.  The Washington Post has already done that by giving it “Four Pinocchios” on its lack-of-truthfulness scale.  It is, of course, a mathematical impossibility to save $300 billion annually from a Medicare Part D prescription drug program that spends less than $80 billion per year.  A candidate making that claim has ventured into loaves-and-fishes territory.

But that particular absurdity notwithstanding, let’s discuss the proposal coming from the current presidential race leaders in both parties that the heavy hand of the federal government should be involved in drug pricing.  There are some myths attached to this idea that, in any reasonable debate, shouldn’t be shunted aside.

Myth #1 – In the Medicare program today, there are no negotiations to reduce drug prices.

This, of course, is patently untrue.  Prices in the Medicare Part D program are determined through a negotiation process involving private health plans and pharmacy benefit management (PBM) companies.  PBMs handle millions of individual pharmaceutical transactions yearly and have the bargaining power to achieve reasonable and realistic pricing.

The proof here is in the proverbial pudding.  Average monthly premiums for enrollees in the Part D program have, according to the Centers for Medicare and Medicaid Services, remained stable at an affordable level for the past five years.

Myth #2 – Federal government involvement in Medicare drug pricing is a pro-consumer idea.

Proponents of federally-dictated drug pricing make it seem all so simple, that if the government takes over drug price negotiations then Medicare prices will drop to the level of the Veterans Administration.  They don’t, however, explain the tradeoffs that come with this kind of policy change.  When you arbitrarily lower prices, you invariably restrict accessibility.  In the VA, for example, nearly one-fifth of the 200 most commonly prescribed drugs are not on its national formulary.  As noted in a paper by the Center for Medicine in the Public Interest, the vast majority of drugs not made available to VA patients are accessible within Medicare Part D prescription drug plans.

This is why the Congressional Budget Office has traditionally been reluctant to ascribe any real savings to the concept of federal price negotiations within Medicare, because of the unlikelihood that lawmakers will tell their senior citizen constituents that many of the drugs on which they depend will no longer be available to them.

And let’s not forget that artificial price controls on pharmaceuticals have an inevitable impact on research and development of new therapies, an unacceptable outcome when devastating (and costly) chronic illnesses like diabetes and heart disease are affecting millions.

Myth #3 – We need hard-nosed federal negotiators sitting at the table with pharmaceutical company executives to push down prices.

The mental image of two sides bickering over numbers from their respective sides of a table is a fallacy.  The reason I put ‘negotiate’ in quotation marks is because there really is no such thing.  The federal government establishes pricing levels and drugmakers must agree to meet those prices in order to be in the Medicare Part D formulary.  This has two effects – (1) the aforementioned restricted access to therapies and (2) the end of competition in the Part D program.  Today, plans compete with each other to provide greater value to enrollees.  With a single federally-set pricing level, the benefits of consumer choice and competition are lost.

The good news here is that there are ways to address healthcare costs while, instead of hurting patients and consumers, actually elevating care quality and bolstering innovation.  The Healthcare Leadership Council unveiled a series of proposals this week to accomplish those goals and I’ll be discussing these in more details in a series of forthcoming posts. Watch this space.

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