House Votes on Medicare

The Federal Government Must Negotiate for More Affordable Drug Prices

It’s common sense: The federal government can and should negotiate for much-needed and significantly lower prescription costs for seniors.

The House of Representatives today approved legislation that will allow the federal government to negotiate directly with prescription drug providers so that our senior citizens who rely on Medicare get the best market price for their medications. Now it’s time for the Senate to act.

Conservatives in Congress and the Bush administration argue that giving the federal government the authority to negotiate directly with prescription drug companies will somehow be unfair to big pharmaceutical companies given the buying clout of the Medicare program. In January 2005, Medicare launched a prescription-drug program, which now provides coverage to about 22 million Americans.

Getting the best price due to volume purchases is what free markets are all about. Since the federal government now buys medications for 22 million people, it should get a really good price—probably the lowest price possible—for the amount of drugs it buys. But this isn’t happening. Instead, the program’s structure prevents Medicare from obtaining the best possible prices for prescription drugs, even though high drug costs were the impetus for the benefit in the first place.

Instead of relying on the market power and administrative efficiency of a single large purchaser, the drug program depends on thousands of stand-alone drug plans and health maintenance organizations to separately negotiate with each and every drug manufacturer, shattering the pricing clout that Medicare would have brought to bear on prices as the single largest prescription-drug purchaser in the United States.

In fact, Congress went even further than simply turning purchasing responsibility over to drug plans and managed-care companies. It prohibited Medicare from “interfering” in the price negotiations between drug-plan sponsors and drugmakers and prevented the Medicare program from taking other steps to reduce drug prices. In essence, Congress left Medicare without the power to do much about high or unfair drug prices.

Nevermind that the one government agency that is empowered to negotiate directly with drugmakers—the U.S. Department of Veteran Affairs—obtains lower prices for veterans in its care. The median price difference between what the Veterans’ Administration pays for frequently prescribed drugs and what Medicare drug plans pay for the same drugs is almost 47 percent.

Now the bill is in the Senate’s court. The Senate may consider several options:

  • Medicare could negotiate with manufacturers for better prices on prescription drugs, which face little competition from equivalent medications. A national buyer could get better results and establish prices for this subset of drugs that would apply to all drug plans and HMOs working for Medicare beneficiaries.
  • Medicare could operate its own drug benefit. Negotiating drug prices for this program would enable Medicare beneficiaries to enroll in drug coverage through the Medicare program itself.
  • Medicare could negotiate benchmark prices which would be guaranteed to Medicare beneficiaries, but if other plans were able to negotiate even lower prices, they would be free to do so.

The Center for American Progress supports any of these possible ways of bringing true market forces to bear in the prescription drug marketplace. We have plenty of other good ideas of how to fix what ails our nation’s health care system.

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