Medicare Price Negotiation is a Destructive and Unnecessary Proposal

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Posted by Alexander Hendrie on Thursday, October 13th, 2016, 3:30 PM PERMALINK

Morning Joe host Joe Scarborough yesterday called for the government to “negotiate” prices for Medicare Part D prescription drug spending.

This is bad policy and would not fix the problems that Scarborough claims it would. Medicare Part D is a success because it empowers free market competition to ensure access to medicines at low prices.

The government shouldn’t mess with a program that isn’t broken, and doing so would do almost nothing to address runaway federal spending. Instead this proposal would decrease access to life-saving medicines and increase costs to the healthcare system over the long term.

Supporters of giving the government power to negotiate over Part D make it sound like a simple solution. But in practice the government would be a terrible negotiator.

Medicare Part D is a Success
Medicare Part D has been successful—for both beneficiaries and taxpayers—due to “rigorous competition in the program.” As noted by Grace-Marie Turner in Forbes, prices are already negotiated down because of “private sector competition through consumer choice and price negotiations by PBMs (Pharmacy benefit managers) and insurers.”  

There is a 90% satisfaction rate among Part D beneficiaries because the program provides a great number of choices for beneficiaries at affordable prices, without putting a price control on drug manufacturers. Part D spending is also 45 percent lower than initial projections and monthly premiums are just half the projected amount.

The program is effective because of “the competition among purchasers who also operate within the commercial market.” The clause that prohibits government interference in private negotiations has been crucial in the program’s success.  

Part D works much better than government programs that have price controls, like the Veterans Affairs Agency. Part D is able to provide far more innovative, life-saving drugs, than the VA does. The VA currently negotiates prices, but has to be selective about which drugs it covers. As a result, veterans are frequently locked out of accessing life-saving medicines, resulting in worse health outcomes, and higher costs to the system.

Part D Protects Medical Innovation
Costs associated with medical development are already significant. On average it costs $2.6 billion and more than a decade of research time for each new medicine that hits the market.

While forcefully reducing the costs of medicine may succeed in reducing the upfront costs of drugs, over the long term it is an incredibly destructive policy. By forcing lower prices, the government creates a disincentive to innovate because there are less profits available to finance the next generation of life-saving and life-improving prescription medicines. In turn, this results in higher long term healthcare costs due to a lack of cures for a variety of illnesses.

As noted by Joseph Gulfo in the Hill, Part D ensures that medical innovation is encouraged:

The 2003 Medicare law exempts Part D drugs from "best price" rebates that drugmakers have been required to give to the state Medicaid programs since 1991. Medicare is prohibited from receiving "best price" to provide incentives to drugmakers to develop drugs for conditions that affect patients over 65 years of age. And this incentive is working — in the first few years after Medicare D was enacted, there was an estimated 40 percent increase in all clinical trials versus expected trends and a 59 percent increase in the number of drugs entering the final phase before FDA approval.

Part D Spending is a Small Percentage of Overall Medicare Spending
Scarborough is correct that spending on federal entitlements are unsustainable. By 2046, the Congressional Budget Office projects that Medicare, Medicaid and Social Security spending will account for half of all non-interest spending.

While there is a need to restrain these costs, Part D Medicare prescription drug spending accounts for a small percentage of overall Medicare spending (and an even smaller percentage of mandatory spending). As shown below, prescription drug spending accounts for just 12 percent of all Medicare spending -- roughly $76 billion. 

This is a small fraction of mandatory spending. In 2015, federal spending on Medicare totaled $634 billion, and all mandatory spending totaled $2.29 trillion according to CBO. Prescription drug spending equals roughly $76 billion.

Scarborough makes it sound as if this is the solution to runaway federal spending. However, reducing Part D prescription drug outlays would hardly dent federal mandatory spending.

Source: Kaiser Family Foundation (Note: Total Medicare spending differs because of updated CBO baseline)

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