Pricing Clout Matters

GAO study highlights why Congress must allow the federal government to negotiate the best prices for drugs offered through Medicare.

Next month, the congressional leadership of the incoming 110th Congress plans to swiftly introduce 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 price for their medications.

It’s about time—as a new study from the General Accountability Office makes abundantly clear. The newly released report on recent drug development examines the variety of reasons why big pharmaceutical companies are failing to deliver new and better drugs to the American people. The drug companies claim we pay sky-high prices for their drugs because of ever-rising research and development costs, yet they aren’t producing those drugs.

The GAO report confirms that pharmaceutical companies are spending more on R&D—147 percent more by the end of 2004 compared to 1993—yet the number of new drug applications arriving at the U.S. Food and Drug Administration are up only 38 percent over the same period. What’s worse, by the end of 2004 the number of new drug applications were down 22 percent over 1999 levels, the most recent high watermark for new drug applications. The pharmaceutical industry argues that it must charge the highest prices for drugs in the industrialized world because hefty R&D costs produce a wealth of new drugs. That’s simply not true.

There are many reasons why it costs so much to take a drug from the laboratory to drug store shelves, which is the main focus of the GAO report. But the pharmaceutical industry can no longer argue that protecting their drugs from the forces of the free market is necessary to sustain innovation in the industry.

Conservatives in Congress and the Bush administration have long argued that giving the federal government the authority to negotiate directly with prescription drug companies will stifle innovation for 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.

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 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.

Never mind 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.

First and foremost, Congress should strike the prohibition for Medicare negotiation authority for prescription drugs. Once done, there are several options for how Medicare could do this:

o Medicare could negotiate with manufacturers for better prices on certain types of prescription drugs. 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.

o 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.

o 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.

The Center for American Progress supports any of these possible ways of making Medicare a better purchaser of prescription drugs. We have plenty of other good ideas of how to fix what ails our nation’s health care system.

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