Medicare Prescription Drug Program Under Pressure From Activist Groups

Published August 23, 2013

A coalition of activist groups is pressuring Congress to end a market-based component of Medicare in an attack on the popular prescription drug program.

Medicare Part D, a bipartisan prescription drug entitlement passed in 2003, prevents the government from negotiating drug prices, instead using a market-based negotiation system to lower costs and increase choices. Each year, private plans submit competitive bids and compete for Medicare Part D enrollees.

Part D has proven popular with seniors, with enrollment growing from 11.6 million in 2005 to 27.6 million in 2012. The program is under budget, with an overall cost of $348 billion, about 45 percent less than the initial ten-year projections by the Congressional Budget Office, and premium costs average 46 percent less than originally estimated over the life of the program.

Yet more than three hundred different advocacy groups, organized by the Alliance for a Just Society, are participating in a signature-gathering effort and advocacy campaign to end the market-based Part D approach and put the government back in control of drug price negotiation. Such as proposal has been introduced as legislation in the form of S. 117, the Medicare Prescription Drug Price Negotiations Act. 

According to Joseph Antos, a senior fellow at the American Enterprise Institute, Part D is one of the rare entitlement programs that costs less than forecast, because seniors receive a certain personal budget, and if they want something that costs more than the options they are provided, they pay the difference.

“Having the government set the prices means that since the government’s incentive is to keep its own budget costs down, they will set the prices that they’ll pay below market rate,” Antos said. “That will do two things: It will drive up the costs of pharmaceuticals for everybody else who is not on a government program, and it will stifle the financial incentives for innovation in the pharmaceutical industry.”

Shift to Generic Drugs

Avik Roy, a senior fellow at rhe Manhattan Institute, says the effort to remove this market-based approach to drug price negotiation is wrongheaded.

“Government setting prices is going to restrict access to a lot of good drugs, but it’s not going to save a lot of money because right now, [the] Medicare Part D program has come in under budget, and that’s because market-based efforts to control costs work,” Roy said.

Roy notes part of the push is driven by the higher price of some name brand-drugs. But 4/5ths of all the money that is spent on prescription drugs in the United States are spent on generic drugs, not name brand drugs, he says.

“There’s all this talk about how branded drugs are more expensive than they are in Europe, but what people don’t realize is that generic drugs in the U.S. are much cheaper than they are in Europe,” Roy said.

Roy notes the next closest country in regard to the amount of money spent on generic drugs is Germany, whose citizens spend only 1/2 of their prescription drug expenditures on generic drugs.

Markets Better than Government

Rep. Peter Roskam (R-IL) says the activists’ pressure on Medicare Part D is driven by ideology, not the program’s outcomes.

“We have in our health coverage system today a system that has largely been insulated from the marketplace, with all the dangers of allowing somebody the ability to make a decision without any benefit for cost savings based on their decision,” Roskam said. “If you look at the testimony and you look at the nature of the arguments that were made by opponents of Part D, [they] wanted to guarantee a price [for the drug premium] to seniors. The irony is that when you look at their so-called guaranteed price, their wonderful planned negotiated rate for seniors, it is actually a higher dollar figure than the cost of the drug premium today.

“That’s where you end up if you assume a federal bureaucrat in a building on the seventh floor on Independence Avenue in a cubicle down around a couple of water coolers has the ability to fix a price point on a drug in a more sophisticated way than the very people who are out purchasing the service,” Roskam continued. “It’s ridiculous.”

Political Maneuvering

Roskam says another motivating factor for those who oppose Part D is the Medicare reform offered by House Budget Chairman Paul Ryan (R-WI), which is built on the Part D competitive bidding model.

“Many on the left find Part D terribly threatening,” Roskam said. “They look at this and understand the model it represents, particularly within these past three years with the passage of the Ryan budget. We were able to say we’re not coming up with some extreme experiment. This is proven. Millions of seniors have made these decisions, and now they’ve been able to count on it. [We can say,] here’s the objective findings, here’s the false claims of the left as it relates to this, and here’s the proof that this is a style of program that works. This is a premium support program, and it is the foundation upon which the entire Medicare debate hinges.”

Rina Shah ([email protected]) writes from Washington, DC.

Internet Resources: “S. 117: The Medicare Prescription Drug Price Negotiations Act.”