Should Medicare negotiate prices? No. Private insurers are already getting discounts.

COMMENTARY Health Care Reform

Should Medicare negotiate prices? No. Private insurers are already getting discounts.

Dec 7, 2006 2 min read
Robert E. Moffit, PhD

Senior Research Fellow, Center for Health and Welfare Policy

Moffit specializes in health care and entitlement programs, especially Medicare.

We all depend, sooner or later, on breakthrough drugs, the product of hundreds of millions of dollars of investment in research and development. They are powerful weapons against disease. But sometimes, after investing huge amounts of money and enlisting the best efforts of brilliant research scientists, the companies making these drugs fail.

Late last week, for example, after investing more than $800 million in trying to develop a blockbuster drug to combat heart disease, Pfizer Inc. stopped work on torcetrapib. The reason: Some participants in the clinical trials died of complications. Pfizer scientists had hoped this new experimental drug would be a powerful treatment to lower the risk of heart attack and stroke. The good news: The scientists are working to discover what went wrong.

Investment in R&D is the lifeblood of America's pharmaceutical industry. Our expectations are well-founded on the performance of America's scientific talent - and the willingness of investors to take the necessary risks.

But the new leadership in Congress wants the federal government to control drug pricing in the huge Medicare program, which would amount to controlling roughly 60 percent of all drugs sold in the United States. Legislative details are sketchy, but the rhetoric is appealing: Substitute ostensibly disinterested government "negotiation" for the current bargaining between health plans and drug companies.

Government "negotiation" would mean that government would fix drug prices. The likely method of enforcing the fixed price would be crude: Congress would simply block entry to any company that wouldn't or couldn't accept the government's fixed price, and companies wouldn't be able to sell to seniors in Medicare. That's bad news for seniors depending on newer and more effective drugs sold by companies locked out of the Medicare "market."

There's a lot wrong with the Medicare drug program. But the intense competition that takes place among health plans offering drug coverage today isn't one of them. When the program started, Medicare officials projected that the average monthly premium would be $37; in fact, it declined to less than $24. Private health plans are securing serious discounts, benefits are generous (especially for poor seniors), and eight out of 10 seniors say they're satisfied. Private-sector negotiators are doing a good job, and the nonpartisan Congressional Budget Office doesn't think the Medicare bureaucracy would do better.

Still, some members of Congress say that with 38 million beneficiaries enrolled, the government's market "clout" as a pharmacy benefit manager would dwarf the private-sector managers already serving Medicare beneficiaries. That's not the case, however. In 2004 alone, Advance PCS covered 75 million people; Medco Health Solutions covered 65 million, and Express Scripts covered 57 million.

There is, however, one big difference between the Medicare bureaucracy and the private-sector benefit managers: Medicare has no experience managing outpatient drug benefits. Moreover, when government officials do "negotiate" drug prices, it almost invariably means setting a price below the market level, which reduces the supply of drugs or restricts the choice of drugs patients can have. Medicaid routinely restricts access to pharmaceuticals, and the Veterans Administration, often touted as a model for federal drug pricing, also has a restrictive list of approved drugs.

In a recent study for the National Bureau of Economic Research, Joseph Golec and John Vernon, professors of economics at the University of Connecticut, estimate that European drug price controls over the last 19 years resulted in a loss of about $5 billion in forgone R&D spending and 46 fewer medicines. They project that adoption of similar policies in the United States, the world's major producer of pharmaceuticals, would likewise result in much greater losses of R&D investment and new medicines.

It's a pretty sure bet that if we make European-style policy choices, we'll get European-style results. You may be spared any anxieties over whether private-sector research scientists will undertake projects worth hundred of millions of dollars in the risky business of scoring big breakthroughs against dreadful diseases. There's a simple remedy: If you are still upset, just take an aspirin and complain to your congressman in the morning.

Robert E. Moffit, Ph.D., is director of the Center for Health Policy Studies at The Heritage Foundation (

First appeared in The Philadelphia Inquirer

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