It's such a simple and politically appealing idea. Get the federal government to negotiate with pharmaceutical companies for the best prices under the Medicare prescription drug program. Use the Medicare system's vast purchasing power to get the best deal for the nation's seniors who need prescription drugs and the taxpayers who underwrite the drug benefit. Wal-Mart does it. Why shouldn't Uncle Sam? Isn't everybody always saying government should operate more like a business?
Yes, it's a simple and politically appealing idea. It wouldn't have made it onto the House Democrats' "First 100 Hours" agenda if it were not. But you don't have to be a drug company or in the pocket of Big Pharma to fear it's bad idea with unintended consequences. Even deadly unintended consequences.
The current Medicare drug benefit law leaves negotiations with drug companies to private-sector insurers and other program participants. Democrats want to give the secretary of Health and Human Services the authority to negotiate directly with the pharmaceutical companies for Medicare drug discounts. HHS Secretary Mike Leavitt is the rare Washington, D.C., official: He doesn't want more power, because he thinks long-term.
It's true, having the feds negotiate discounts directly would drive down prices for patients and taxpayers. Big time. The Manhattan Institute's Benjamin Zycher figures the average price reduction for drugs from 2007 to 2025 would be about 21.8 percent. But there's what the makers of a recent Wal-Mart documentary called "the high cost of low price." Indeed, the long-term costs of low drug prices would be even higher—for Medicare and non-Medicare patients alike.
Somebody's going to swallow those price reductions, and that would be the pharmaceutical companies. But the financial reaction doesn't end there. Zycher calculates that the drug companies would reduce their research and development by about $10 billion per year to pay this "implicit tax."
"There is no dispute in the economics literature with respect to the downward effect of mandated price discounts upon research and development investment," he writes. "The analytic issue to be addressed is the likely magnitude of that impact . . .."
Using National Science Foundation data on historical investment trends, Zycher estimates that the reduction in research and development would mean about 10 fewer medicines a year.
What would this mean in human terms? His research projects a loss of 5 million expected life-years annually, which can be valued conservatively at about $500 billion per year, far more than total annual U.S. spending on pharmaceuticals.
Even in the present, however, Medicare patients would likely have access only to certain cheap drugs. Why? Because Uncle Sam is not Wal-Mart.
The incentives for federal policymakers are different than they are for private-sector negotiators dealing with drug companies. Insurers and private-sector drug purchases must strike a balance between low prices and the drugs available through their program (their formulary) in order to please their customers, who can always go elsewhere. Federal policymakers, by contrast, would have different incentives. Lower prices for Medicare drugs mean reduced program budgets—money that can be spent elsewhere—and a less inclusive drug formulary can produce lower Medicare drug prices. And Medicare drug beneficiaries wouldn't be able to go elsewhere.
This is just what happens at the Department of Veterans Affairs. It does not negotiate with drug companies, but does benefit from price-discount provisions written into law. Its formulary includes some 1,400 drugs. The formularies that private purchasers now negotiate under the Medicare drug benefit include about 4,300 drugs. In addition, Zycher notes, "drugs covered by the VA formulary are significantly older than those covered by Medicare Part D or by private health insurance plans."
So the government may be able to provide you with a deeply discounted drug, but the older and cheaper medication might not be right for you.
Zycher's conclusion: "Cheap drugs in the here and now would prove expensive indeed tomorrow."
David Reinhard
