Keep Government Out of Drug Negotiations

COMMENTARY Health Care Reform

Keep Government Out of Drug Negotiations

Sep 27th, 2004 3 min read

Ever heard of LaRue Martin? He was the first player taken in the NBA draft in 1972. A spindly 6'11" forward who still holds the career rebounding record at Loyola University of Illinois, he went to the Portland Trail Blazers, who saw him as a mainstay of their team for years to come.

Four years later, he was out of basketball, having scored a grand total of 275 points in 271 games. Today, he is regarded as the worst top draft pick in the history of American sports.

When it comes to prescription drugs, Uncle Sam now risks becoming the new LaRue Martin. Many in Congress want to draft Uncle Sam into the fight to lower prescription-drug prices. Like Martin, he's a big player. But, also like Martin, he's unlikely to fulfill his supporters' expectations.

Thanks to last year's Medicare prescription-drug legislation, in January 2006, Medicare will begin to pay for a large share of the drugs consumed by seniors. Now, some members of Congress think they see in Uncle Sam a force that can single-handedly cut prescription-drug prices. They want to strike a provision in the law that bars the government from negotiating directly with drug companies, pharmacists and insurance plans over drug prices.

Medicare brings 41 million customers to the table, which they figure should give Uncle Sam plenty of clout to drive down drug prices.

But, like LaRue Martin's game, what you see won't be what you get. For one thing, Uncle Sam is far from the biggest player on the block. Three pharmacy benefit managers (PBMs) - Advance PCS, which covers 75 million people; Medco Health Systems, which covers 65 million; and Express Scripts, which covers 57 million - already are much bigger than all of Medicare and bring decades of experience to the market.

If Medicare were to organize its own PBM, it would represent, at most, the 41 million eligible for the drug benefit. But 30 million of them have their own private insurance, meaning Medicare would be negotiating on behalf of 11 million. That would make Medicare, at best, the seventh-largest PBM, and No. 7 in any market doesn't pull a lot of weight.

Then there's the "rookie" problem. Medicare has no expertise in drug purchasing, and the learning curve would be both difficult and expensive. Drugs are not commodities. A cheaper one can't always be substituted for a more expensive one without creating risks for the patient. Successful PBMs have learned through experience to strike the proper balance between cost and patient need.

Market share aside, some argue that government has additional powers to force down drug prices that private PBMs lack. That is true. Uncle Sam could pursue four additional courses of action to lower prices, but all of them would have adverse effects on patient care.

First, it could impose increased substitution of drugs - forcing patients to accept less expensive, but also less effective, drugs. Second, it could restrict market access - that is, allow only cheaper drugs to be sold - which probably would lead to increased physician and hospital costs as patients are denied the drugs they need in favor of those government has decided to purchase. Medicaid, the Veterans Administration and foreign national health programs can attest to this.

Third, it could fix the prices Medicare pays to drug manufacturers just as it artificially fixes the prices it pays doctors and hospitals. But Medicare's record of price-setting for other medical services - which is causing more and more doctors to refuse to accept new Medicare patients - doesn't bode well for this venture. Or it could extract price concessions by non-market means - i.e., by fiat. But for that threat to hold, Uncle Sam would have to be willing to deny patients the benefit of drugs made by manufacturers who refuse to "play ball."

The truth is that, despite the glowing scouting reports, the government could not do a better job than private PBMs at negotiating lower drug prices for Medicare beneficiaries without harming patient care. Even the Congressional Budget Office admitted as much in a letter to Senate Majority Leader Bill Frist.

The authors of the new Medicare law actually got it right on this point. By letting Medicare beneficiaries get their drugs through private plans, they will have on their side big, experienced players who know how to negotiate drug prices and still ensure that patients have access to the drugs they need.

Congress drafted the right players in the first round. If they stick with their picks, come January 2006, Medicare will be fielding the best team possible for helping seniors get better access to needed medicines at reasonable prices, without risking their health in the process.

Ed Haislmaier is a visiting research fellow in the Center for Health Policy Studies at The Heritage Foundation, a Washington-based public policy research institute.

First appeared on Fox News

Donate to The Heritage Foundation

Our more than 100 policy experts and researchers are invited to testify before Congress nearly 40 times a year