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News of the Day ... In Perspective


Congress moves toward price controls on drugs

In a first swipe at American medicine, the House of Representatives passed, on a vote of 255 to 170, a measure requiring the government to “negotiate” prescription drug prices with the pharmaceutical industry, H.R. 4. The Senate is closely divided on the issue, and President Bush has threatened a veto (Sarah Lueck, Wall Street Journal 1/13/07).

Proponents say that Medicare’s vast enrollment would give government negotiators sufficient clout to get a “better deal,” just as the Veterans Administration does.

Under the current system, prices for drugs covered by Medicare Part D are negotiated by insurers with Part D plans and pharmacy benefit managers (PBMs). The three largest PBMs dominate much of the drug purchasing world and serve some 200 million Americans, giving them enormous market clout.

The VA is different from Medicare in that it buys drugs in bulk, which does lower marketing costs, whereas Medicare pays the bills for individual purchasers. Also the VA’s savings comes partly from its political power to threaten to deny firms access to the Medicare and Medicaid programs. Moreover, the VA constitutes a relatively small share of the marketplace, so that firms have the potential to shift costs elsewhere, explains Fred L. Smith, Jr., of the Competitive Enterprise Institute (TCS Daily 1/16/07).

The main tool that the VA uses to control drug costs is restricting the set of drugs that are covered. Less than one-third of the drugs available to Medicare patients are available to VA patients (NCPA Daily Policy Digest 12/18/06). In fact, veterans are denied access to 81 percent of the drugs approved by the FDA since 2000, according to Burke Balch, medical ethics director of the National Right to Life Committee (NRLC) (LifeNews.com 1/15/07).

If Medicare pushes prices down for its beneficiaries, others will pay more. Medicaid’s drug reimbursement practices resulted in a seven to 10 percent increase in the average price of a prescription drug.

As David Hogberg points out, “Medicare doesn’t negotiate prices. It sets them.” If Medicare demands to pay no more than the “average” price, there is every incentive to increase prices in the private sector, so as to increase the “average” price and thus Medicare reimbursement (NCPA Press Release 1/2/07).

Market share is not the same thing as bargaining power, point out Alain Enthoven and Kyna Fong. Bargaining power is the ability of a party to walk away from the table. In the days of direct-to-consumer advertising, it is not so easy for Medicare to refuse to cover a popular drug. In contrast, in Canada and European countries, consumers don’t hear about drugs until the government has approved the drug—and the price (Wall Street Journal 11/13/06).

Medicare’s ultimate weapon, Smith observes, is to demand that a manufacturer sell to Medicare at bargain-basement prices—or sell to no one at all. “Negotiation” is really a push to impose price controls and could quickly turn the innovative pharmaceutical sector into another regulated utility, with a drastic reduction in pharmaceutical advances.

NRLC opposed H.R. 4 because it feared the bill “threatens to force…death-dealing rationing [by price controls] on older people by limiting not what the government spends but what senior citizens themselves choose to spend of their own money to save their own lives,” Balch said.

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