Drug-Price ‘Negotiation’ Would Stifle Patient Choice, Dampen Innovation

Published March 1, 2007

Since the new year began, we’ve been dealing with all-talk-all-the-time about prescription drug prices.

The idea that the government should negotiate prescription drug prices was behind a key piece of health care legislation in U.S. House Speaker Nancy Pelosi’s (D-CA) 100-hour marathon, and the House debated and voted on the measure on January 12.

It sounds so simple. Since we are in favor of competition and price negotiation, what could possibly be wrong with the government negotiating prices?


Cracking the Door

First off, it’s a foot in the door for price controls throughout the health sector, starting with the industry that has so far largely escaped the heavy hand of government in regulating prices.

Price controls inevitably lead to scarcity of supply, reductions in quality, and dampening of innovation–and usually all of the above.

A good case could be made that the prevalence of price regulation over physicians’ fees and hospital charges, with the accompanying mountains of paperwork to justify those charges, is eroding the quality of American medicine. It certainly is restricting access to physicians for Medicaid beneficiaries and for many seniors on Medicare.

Negotiating Prices

Second, governments don’t negotiate prices; they dictate them. When was the last time your physician negotiated his or her payment rates with Medicare or Medicaid? It doesn’t happen. Government sets a price, and that’s it.

“But,” many will argue, “the government negotiates drug prices at the Department of Veterans Affairs (VA) and look what a great deal they get.”

It isn’t such a good deal when you want a choice of drugs, especially new drugs. Columbia University Prof. Frank Lichtenberg, in a paper published in 2005 by the Manhattan Institute, found only 38 percent of the drugs approved by the Food and Drug Administration (FDA) in the 1990s and 19 percent of the drugs approved since 2000 are on the VA national formulary.

The only way negotiation works is for buyers to be able to walk away from the table if they don’t get their price. That’s what the VA does, and the result is significantly reduced access to new drugs.

A government agency negotiating drug prices for everybody couldn’t walk away from the table and deny millions of Americans needed drugs. So they would ultimately end up dictating the price if the manufacturer doesn’t agree.

Experiencing Choice

Third, after experiencing choice in the new Medicare Part D program, seniors will be loathe to tolerate such restrictions.

A Kaiser Family Foundation survey published in December 2006 showed 85 percent of Americans support allowing the government to negotiate prescription drug prices for the Medicare program. But an unpublished Dutko Research survey conducted in December 2006 shows support drops to 30 percent when people learn it would mean they could choose only from a list of government-approved drugs.

Fourth–and the list could go on–experts at both the Congressional Budget Office and the Office of the Actuary at the U.S. Department of Health and Human Services have said government involvement in price negotiation will not lead to lower costs for taxpayers and would lead to significant restrictions in access to drugs for seniors.

The government would have a hard time beating the incredible results the private plans negotiating drug prices for Medicare already have produced. As Sarah Berk, executive director of Health Care America, a free-market group partly funded by the pharmaceutical industry, noted in a January 8 op-ed published in the Charlotte Observer, 90 percent of Medicare beneficiaries now have prescription drug coverage, and 80 percent say they’re satisfied with it.

Competition among the plans and choices for seniors have produced dramatic savings for seniors, with average monthly premium prices down more than 40 percent from the expected $37 when the benefit was enacted in 2003. The premiums fell further from 2006 to 2007, from $23 to $22 a month.

The cost to taxpayers (including subsidies to the benefit) was an estimated $13 billion below projections in the first year alone, the Centers for Medicare and Medicaid Services announced in early January.

Continuing Debate

This is an important debate, one that opens the door for a serious conversation about the value of competition, choice, and free markets.

Pelosi may have an advantage with the rhetoric on this one, but free-market advocates have the advantage of evidence and history that prove competition is the most effective means of ensuring buyers and sellers get the best price and the best value.

Grace-Marie Turner ([email protected]) is executive director of The Galen Institute, a free-market think tank in Alexandria, Virginia.

For more information …

“Older Drugs, Shorter Lives? An Examination of the Health Effects of the Veterans Health Administration Formulary,” by Frank R. Licthenberg, Medical Progress Report No. 2, Manhattan Institute for Policy Research, October 2005, http://www.manhattan-institute.org/html/mpr_02.htm

“The Public’s Health Care Agenda for the New Congress and Presidential Campaign,” Kaiser Family Foundation, December 2006, http://www.kff.org/kaiserpolls/pomr120806nr.cfm

Dutko Research, December 6, 2006, http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/12-21-2006/0004495560&EDATE=

“Should Congress Work Toward Universal Health Care? NO: Beware Big Changes in a System That Doesn’t Need Fixing,” by Sarah Berk, Charlotte Observer, January 8, 2007, http://www.charlotte.com/mld/observer/news/opinion/16407876.htm