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WebMemo #02-07 on Health Care

January 11, 2007

Medicare Malady #02-07: Government "Negotiation" = Higher Drug Prices


The Congressional Budget Office yesterday threw cold water on House Democrats all ready to make the feds negotiate Medicare drug prices. Turns out, according to CBO, the government can't negotiate lower prices unless it restricts the number and types of drugs it covers-something seniors aren't at all anxious to see.

The drug-price controllers got a second dousing today, when Heritage Foundation health care expert Ed Haislmaier testified before the Senate Finance Committee. Haislmaier said that government negotiations might actually increase the total cost of the program - possibly by as much as 20 percent.

Haislmaier referred to recent data from CBO and the Centers for Medicare and Medicaid Services (CMS) indicating that the current Medicare drug program-which relies on private sector competition and consumer choice-has reduced program costs for the poorest seniors by some 23 percent below what had been projected based on the experience of state Medicaid programs -

which mandate price discounts.  According to CBO, the current approach is projected to save state taxpayers $12 billion over the next five years.

The chart below summarizes the evidence. Based on a year's experience with providing drug coverage for dual-eligibles (the nation's poorest seniors, eligible for drug coverage under both Medicaid and Medicare), both CMS and CBO revised their cost estimates sharply downwards.  It seems competition and consumer choice are turning in a better cost control performance then government mandated discounts.

Click to View Chart

For more information or to receive an e-mail version of "Medicare Maladies," contact medicaremaladies@heritage.org  or call Heritage Media Services at (202) 675-1761.  ("Medicare Maladies" is a regular feature, first launched in 2003 and revived in 2007, from The Heritage Foundation. Sad to say, there's another malady coming your way soon. Other "maladies" are also available on heritage.org.)

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