Negotiating Medicare Drug Prices Best Done By Seniors, Not Government

January 10, 2007

January 10, 2007 -On the eve of Congressional debate over allowing Medicare to negotiate prescription drug prices, the National Center for Policy Analysis (NCPA) has released two reports that suggest prices are most effectively lowered by empowered consumers. 

In the first report, Medicare: Negotiated Drug Prices May Not Lower Costs, Alan Enthoven and Kyna Fong explain drug prices for seniors may not go down.  They may even go up.  According to the report, the key to tough negotiations is the willingness and ability to walk away from the table with no deal.  Clearly the VA system does this.  Veterans have access to only one-fourth the number of drugs that Medicare covers.  But the wrath of senior voters and the lobbying power of pharmaceutical companies may make it impossible for Medicare to emulate the VA's approach.

A drug company with a (patent rights) monopoly has an incentive to price discriminate among private buyers - charging lower prices to some and higher prices to others.  But if the government negotiates a single price for everyone, the resulting price is likely to be higher than lowest prices paid by private buyers.  Under one common tactic, government links the price it will pay to the prices paid by other buyers - for example, by insisting on paying the lowest price paid by any buyer.  But instead of lowering the price paid by government, such a strategy may instead lead to higher prices charged to private buyers. 

In the second report, Senior's Drug Costs: Government Versus the Internet, NCPA Senior Fellow Devon Herrick notes some of the easiest ways to reduce spending on health care relate to pharmaceuticals - especially switching from brand drugs to therapeutic, generic and over-the-counter substitutes.

Herrick explains that there are lessons here for seniors.  "Those experiencing high out-of-pocket costs in the "donut hole" wouldn't be in the donut hole if they (or a family member) took advantage of tools available on the Internet - to choose less expensive drug options and plans that best fit their needs."

Since drugs affect people differently, seniors need to keep their options open.  Seniors as a group would suffer if we adopted a command and control approach like the VA system, which pays reduced prices but limits availability to a very restrictive formulary. 

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