New Brunswick, NJ, October 7, 2002 — The ink is barely dry on the new “Medicare Prescription Drug and Modernization Act” and already opponents of the law are seeking radical changes to it. In addition to the AARP, Families USA, citizen lobbying groups, and members of Congress have recently called for amendments to the new law, allowing the federal government to grant itself the right to “negotiate” drug lower prices for seniors.
Although this may appear to be desirable in containing costs to the Medicare program and providing seniors with the lowest possible prescription drug prices, advocates of this idea fail to see the consequences of it as well. And a look back in history provides some insights as to why price controls (and that’s really what government “negotiated” prices are) consistently fail.
Critics of the pharmaceutical industry may ask, “What’s wrong with negotiated prices?” They point to the fact that many other groups get to negotiate for the best possible price from drug companies and wholesalers.
However, there is one critical difference: the U.S. government doesn’t negotiate prices — it sets them, according to Gail Wilensky, former director of the Medicare program.
That sentiment was also echoed by James Pinkerton, a fellow at the New America Foundation in Washington D.C. “The problem is that it won’t be a real negotiation. The federal government is so big and so powerful, it doesn’t negotiate prices; it sets them,” he says.
Pinkerton also warns of another consequence of artificially low drug prices: drug shortages. “In the 4th century, the Romans imposed price controls on food. And why not? Everybody needs to eat, right? But the result was counterproductive and the people brought provisions no more to the market, since they could not get a reasonable price for them. And so medicines will be affordable for as long as they are available.”
Consequently, the unforeseen outcome of “negotiated prices” is the drug shortage and lack of new investment in R&D that will inevitably occur, if the government dictates the price on prescription drugs to research-based pharmaceutical companies. Instead, the pharmaceutical industry, economists and citizen groups are urging that Congress focus on understanding the new provisions of the Medicare Law and giving the new structure a chance to work.
Many economists and think-tank groups have touted the enormous benefit to seniors as the most cost-effective way to deliver a prescription drug benefit to seniors. Even the non-partisan Congressional Budget Office found that multiple competing private sector plans can contain costs more effectively than a government-controlled benefit.
For instance, the CBO scored the Medicare Act as getting a higher “cost management factor” than other proposals aimed at driving prices down. In addition, CBO estimates that substantial savings will be obtained by the private plans and that the secretary (HHS) would not be able to negotiate prices that further reduce federal spending to a significant degree.
In fact, the new Medicare law contains the following cost containment items, which are certain to provide significant spending controls — all due to competition and the private sector approach. The new Medicare law relies on market competition, not price fixing, to deliver the drug benefit and the entire approach is to get seniors the best deal through vigorous market competition, not price controls.
Here’s what seniors can expect:
- Private Plans will negotiate with a range of parties, including manufacturers.
- The better a plan is able to negotiate, the lower its premiums and cost-sharing for enrollees. That will help attract more enrollees and exert more leverage when negotiating in the future.
- Beneficiaries receive the benefit of negotiated prices, which must be disclosed to them. Private plans have further incentives to negotiate intensely since consumers may be selecting their plan based on its discounted prices.
- Generic substitution is encouraged by requiring that pharmacies tell patients of the lowest costs alternatives available.
- The Medicare law gives patients choice among medicines by assuring that their prescription drug plan will cover at least two medicines of each type and also giving patients the right to appeal if they need a medicine not covered by their plan.
- Because there will be a substantial financial risk, private plans will have strong incentives to negotiate price discounts, both to control their own costs in providing the benefit and to attract enrollees with low premiums and cost-sharing requirements.
Let’s finally set the record straight on this one and stop scaring seniors. The new Medicare law gets the government — and ultimately the consumer — a better deal than price controls ever could. The new structure appropriately ensures patients’ access to life saving drugs without the threat of drug shortages and bureaucratic errors.