Bush Administration says it opposes Democrats' plan to allow Government to negotiate Medicare drug prices

Nov 13 2006

The Bush administration will oppose any attempts by congressional Democrats to pass legislation that would authorize the government to negotiate with pharmaceutical companies under the Medicare prescription drug benefit, according to HHS Secretary Mike Leavitt, the New York Times reports.

The 2003 Medicare law prohibits the federal government from negotiating drug prices or establishing a list of preferred drugs. Rep. Nancy Pelosi (D-Calif.), who is expected to become House speaker, has said her party will take up legislation that would repeal the ban on negotiations within the first 100 hours of assuming the majority in the House. Leavitt said the Bush administration opposes that change and does not intend to compromise on the issue. "In politics, most specific issues like this are a disguise for a larger difference," Leavitt said, adding, "Government negotiation of drug prices does not work unless you have a program completely run by the government. Democrats say they want the government to negotiate prices. What they really want is government-run health care." Leavitt said negotiations would destroy the structure of the drug benefit, which relies on competition between private drug plans. "I don't believe I can do a better job than an efficient market," he said, adding, "We are seeing large-scale negotiations with drug manufacturers, but they are conducted by private drug plans, not by the government. A robust marketplace with a lot of competitors has driven down prices. It's the magic of the market. To assume that the government, in our genius, could improve on this belies the reality of a complex task."

Democrats' Plan

According to the Times, "Democrats have not specified exactly how Medicare would negotiate with drug companies." Sen. Dick Durbin (D-Ill.) has introduced a bill that would require the HHS secretary to offer and operate at least one Medicare drug plan, in addition to the current private plans. The bill also would require the secretary to negotiate prices with companies that manufacture drugs covered by the government plan. Pelosi is cosponsoring a similar bill in the House. All eight Democrats newly elected to the Senate have said Medicare should be allowed to negotiate with pharmaceutical companies.

Challenges

Drug companies and some economists have raised concerns that the government might insist that its own Medicare drug plan receives the "best price" offered to any private plan. To negotiate further discounts, the government drug plan likely would have to establish its own formulary, the Times reports. James Lang -- former president of Anthem Prescription Management, which administers drug benefits for about five million individuals -- said, "For this to work, the government would have to take over price negotiations. It would have to take over formularies. You can't do one without the other." Lang added, "Drug manufacturers won't give up something for nothing. They will want a preferred position on the Medicare formulary -- some way to increase the market share for their products." However, Durbin said, "This is just good old-fashioned free market economics. If one buys in bulk, the price goes down." Another potential challenge to the Democrats' plan is that some lawmakers, including some Democrats, might seek to hold hearings, which could delay the process of passing legislation. Current federal law requires drug companies to provide discounts for most brand-name prescription drugs covered by Medicaid and for the Department of Veterans Affairs drug program, which negotiates prices. Leavitt said the VA program is not a good model for Medicare (Pear, New York Times, 11/13).

Editorial, Opinion Pieces

Two newspapers recently published an editorial and two opinion pieces on the Democrats' proposal to allow Medicare to negotiate drug prices.

• USA Today: Democrats should adopt a "go-slow approach" to overhauling the Medicare drug benefit, a USA Today editorial states. The editorial notes that Medicare beneficiaries "account for half of all drug prescriptions," adding that with "that kind of clout, government might try to dictate prices, not just negotiate them." In addition, the editorial states, lower drug prices "create less incentive for research." The editorial says that aides to Rep. Pete Stark (D-Calif.) "couldn't provide any details on the [Democrats'] proposal -- such as whether a government-run program would compete with the private plans that have already enrolled about 30 million seniors, or whether it would replace them altogether." According to the editorial, the lack of clarity "suggests that the Democrats' proposal was more of a campaign pander than a fully baked plan." The editorial concludes, "The public would be best served if the new Congress conducts in-depth oversight to gather the facts, rather than rushing through legislation within 100 hours to fix something that isn't necessarily broken" (USA Today, 11/13). Stark, USA Today: "There is no reason to wait" to enact changes to the Medicare drug benefit, Stark, the most senior Democrat on the House Ways and Means Subcommittee on Health, writes in a USA Today opinion piece. According to Stark, "quick congressional action might save a life" for a beneficiary who has reached the so-called "doughnut hole" coverage gap and cannot afford to pay out of pocket for medications. He adds, "I believe we must start work immediately to improve this incomprehensibly complicated plan, which overpays and deregulates private plans to the detriment of the beneficiaries and taxpayers." According to Stark, drug plan premiums "are lower than expected, not from market competition, but from massive Medicare subsidies to the insurance industry." He writes that a "Medicare-run plan could offer true competition" by providing "less than 3% overhead, universal coverage and lower prices." In addition, Stark notes that former HHS Secretary Tommy Thompson "took just over a month to negotiate a 50% reduction in the price of Cipro" after the anthrax attacks several years ago. Stark adds, "There is no reason that Medicare cannot do the same," concluding, "If not now, when?" (Stark, USA Today, 11/13).
• Alain Enthoven/Kyna Fong, Wall Street Journal: "There are several good reasons that government negotiations may not decrease drug costs," Enthoven, a professor emeritus at the Stanford University Graduate School of Business, and Fong, a doctoral student in economics at the school, write in a Journal opinion piece. Enthoven and Fong write, "People often confuse market power with bargaining power," adding, "The thinking goes, the larger the share of the market the buyer represents, the greater the bargaining power and thus the lower the prices negotiated." However, according to Enthoven and Fong, "[t]hat line of reasoning fails with drugs ... because the seller is frequently a monopolist so it cannot be threatened with replacement by a substitute. Instead, the only threat is exclusion from the market." In addition, "a party's bargaining power is determined simply by its ability to say no, to walk away from the table without an agreement," they write. In government negotiations, "there are few drugs [officials] can exclude without facing political backlash from doctors and the Medicare population, a very influential group of voters," according to Enthoven and Fong. They add that negotiations also would not work because of "the familiar economic argument that the market-determined price is the only fair price. How can the government determine what price is 'fair,' what price appropriately reimburses pharmaceutical companies for all their research and development efforts?" (Enthoven/Fong, Wall Street Journal, 11/13).

Broadcast Coverage

• NPR's "Weekend Edition Sunday" included an interview with Rep. George Miller (D-Calif.) about Democrats' policy initiatives, including the issue of Medicare negotiating prescription drug prices (Seabrook, "Weekend Edition Sunday," NPR, 11/12). Audio of the segment is available online.
• NPR's "Morning Edition" on Monday reported on the Nov. 15 start of the open enrollment season for the Medicare prescription drug benefit and beneficiaries' experiences with the coverage gap. The segment includes comments from acting CMS Administrator Leslie Norwalk; Peter Sikora, an outreach coordinator for Consumers Union and co-author of a recent study comparing retail prices with the prices Medicare beneficiaries would pay in the coverage gap; and two Medicare beneficiaries (Silberner, "Morning Edition," NPR, 11/13). Audio of the segment is available online.