In his State of the Union address in February, President Obama rattled the cages of pharmaceutical companies by proposing to bring down costs with changes in the way the government pays for Medicare. His plan would aim “to reduce taxpayer subsidies to prescription drug companies.” The president hardly is the only one to press the idea of lowering costs by changing how the Medicare program pays for prescription drugs.
Enacting the prescription drug benefit, Medicare Part D, in 2003, Congress expressly barred the federal government from “interfering” in negotiations between drug companies, pharmacies and prescription drug plans. As a result, the government cannot use its leverage of 49 million Medicare beneficiaries to negotiate for substantially lower drugs prices. Rather, more than 3,000 private drug plans compete for enrollment that would give them the size and clout to negotiate cheaper prices from drug companies.
Critics such as Sen. Sherrod Brown, a Democrat from Avon, have long argued — correctly — that the rule in effect represents a substantial subsidy to the $300 billion-a-year pharmaceutical industry at the expense of taxpayers. Further, the prohibition is not consistent with how other federal agencies, primarily the Department of Veterans Affairs and the Defense Department, keep drug costs low.
Brown is a co-sponsor of legislation in the Senate that, among other things, would scrap the non-interference rule, permitting the Department of Health and Human Services to negotiate volume discounts for Medicare prescription drugs.
Subsidies for Part D beneficiaries cost the government about $67 billion in 2011. Congress, obsessed lately with slashing federal spending, cannot very well ignore the unnecessary expense of barring Medicare from direct negotiation. Estimates are, the ability to negotiate discounts would save the government roughly $240 billion in Medicare costs over 10 years. A Boston University study that compared the Veterans Affairs’ drug pricing to Medicare’s concluded that from 2007 to 2009, the VA paid 40 percent less for prescription drugs than Medicare. The study calculated that if Medicare received the same prices as the VA, it would save, in 2009 prices, about $14 billion a year. Worth considering as well, a report in April by the Government Accountability Office noted that for several of the drugs in its study of the VA and Defense Department direct purchase prices, both agencies paid less than the lowest prices made available to other government purchasers of the drugs, including Medicaid, which serves low-income families, poor seniors and people with disabilities.
Drug companies point out that as structured, the drug benefit works well and is popular with seniors. Tampering with it, they contend, would have a detrimental effect on seniors, force costs to shift to other consumers and drive up drug premiums for people who can’t afford higher out-of-pocket costs. The drug benefit is popular, to be sure. And more so as the Affordable Care Act gradually closes the “doughnut hole,” making prescription drugs more affordable for Part D enrollees. All the same, price negotiation has proved essential in holding down drug costs for some federal programs. Other than protecting the profits of drug companies, there is no reason to deny the same ability to Medicare.