Latest Medicare Reform Proposal Is ‘Just Plain Politics,’ Think Tank Says

Published February 5, 2004

CHICAGO–Today two U.S. Senators, Ron Wyden (D-Oregon) and Olympia Snowe (R-Maine) plan to introduce legislation allowing the federal government to directly negotiate drug prices with private drug companies. The legislation, called the “Medicare Enhancements for Needed Drugs Act,” also takes steps to legalize the importation of drugs from Canada and penalize drug companies that limit their exports to Canada.

Following are comments by Joseph Bast, publisher of Health Care News, a national monthly newspaper, and coauthor of Why We Spend Too Much on Health Care and What’s Wrong with Importing Drugs from Canada? Bast is also president of The Heartland Institute, a 20-year-old national nonprofit research organization based in Chicago.

  • This bill is just plain politics. The ink is barely dry on the Medicare Prescription Drug, Improvement, and Modernization Act, which President Bush signed on December 8, and already liberal Democrats and liberal Republicans are trying to score election-year points by promising voters something for nothing. In this case, they are promising cheaper drugs for seniors that are just as safe and effective as the drugs they are buying today. It’s a promise they can’t keep.
  • The clause in the Medicare reform act at issue was put there to protect, not limit, negotiations for lower drug prices for seniors. Here’s the actual language of the clause:

1860D – 11(i) NONINTERFERENCE–In order to promote competition under this part and in carrying out this part, the Secretary (1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and (2) may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.

Under the law, competitive bidding occurs between drug companies and private benefit management companies competing to provide the most popular plans. This clause simply keeps the government from bullying into the process by imposing national price controls. This clause is a good thing–a reminder that this program is to be privately delivered, not run by government bureaucrats.

  • Private negotiations will achieve significant savings for seniors. We have evidence of this from existing private drug insurance programs. AARP’s 35 million members saved $402 million in 2003; Reader’s Digest also offers coverage that saves its members hundreds of millions of dollars. Major employers and HMOs negotiate directly with drug companies for discounts. We don’t need government to negotiate prices to take advantage of large numbers of buyers.
  • Government bureaucrats are unlikely to do better. Do we really think the same folks who gave us $500 toilet seats and $1,200 hammers would do a better job negotiating for lower prices than private drug benefit management firms that specialize in doing this? In the private sector, drug benefit management companies survive only if they can negotiate better prices than their competitors. In government, there is no competition, no benchmarking, and no accountability for failing to negotiate tough.
  • Direct negotiation leads to price controls. Governments don’t “negotiate” prices, they set a price and punish firms that fail to sell at that price. For example, in Canada and much of Europe, refusal to sell at the government-determined price can result in domestic firms being licensed to produce patented drugs. Here in the U.S., threats were made to suspend the patent rights of manufacturers of Cipro, the smallpox vaccine, if they did not lower their prices. In Illinois and Minnesota, state attorneys general are threatening legal action against drug companies that limit their exports to Canada to discourage reimportation. This isn’t negotiation. It’s price controls.
  • Government price negotiation has a bad record. Negotiations by state governments with drug companies for rebates and supplemental rebates under Medicaid have led to restrictive formularies (limiting access to the newest drugs), cost-shifting (resulting in higher prices for the uninsured and privately insured), and de facto price controls. Price controls on oil and natural gas led to the “energy crisis” of the Carter years, which only ended when President Reagan ended price controls. Studies show drug price controls in Europe cost citizens more–in lost wages, profits, and poor health–than they save in cheaper drugs.
  • If given the power, politicians always set prices too low. The reason is the benefits of lower prices are immediate and visible, while the costs are largely invisible and longer-term … after voters have forgotten or the politician has left office. The result is less investment, innovation, competition, and consumer choice in the price-controlled industry.
  • Price controls lead to less effective and less safe drugs. Drug companies that invest the least in research and quality control are most able to afford to capitulate to government price controls, rewarding those companies that contribute the least to new drug discovery and existing drug safety. Drugs that lose in a fair competition with other drugs are also favored, since restrictive drug formularies force doctors to prescribe them even though doctors know another drug not on the formulary would be superior. In both cases, the lives of patients are put at risk.
  • Liberal Democrats and Republicans haven’t demanded government price negotiation in the past. Wyden and Snow both have supported bills in the past that prohibit the federal government from negotiating directly with drug companies: S.1185 (2001), S.2719 (2002, Snowe only), and S.1 (2003). President Clinton’s Medicare modernization proposal specifically prohibited direct government negotiation. Similar noninterference language has appeared in most of the Medicare reform bills introduced by Democratic senators and representatives over the years.
  • Congress’s own health care plan doesn’t allow government to negotiate directly with drug companies. The Federal Employees Health Benefits Program (FEHBP), often cited as a model for national health insurance reform, relies on private health plans to negotiate drug price discounts on behalf of federal employees. This is not an accident: The program allows a wide variety of plans to meet the needs and situations of its members. A single restrictive drug formulary would not be best for every federal employee … nor would it be best for America’s seniors.

A few weeks ago, Democratic presidential candidate Howard Dean said, “You know why 50 percent of the people in this country don’t vote? It’s because they hear politicians [making unrealistic promises] every single time before an election, and then they forget about it when they get to Washington.” [Washington Times, January 27] Dean is absolutely right. Voters should ignore the promise of cheaper and safer drugs made possible by direct negotiation between government and drug companies.

Editors: For more information about Joseph Bast or The Heartland Institute, please go to The complete texts of Why We Spend Too Much on Health Care and What’s Wrong with Importing Drugs from Canada? are available online at that Web site. To contact Joseph Bast, call 312/377-4000 or send email to [email protected].