HOUSE Democrats delivered on a campaign promise Friday (January 12, 2007), in passing a Bill that would allow the government to negotiate the price of pharmaceuticals, but only those now covered by the new Medicare drug benefit.
The hope is that government negotiators could force prices down, and in so doing generate significant savings that could improve and possibly expand the benefit more generous.
But the measure may be misguided.
As a model, the Dems point to the Department of Veterans Affairs, which negotiate discounts for the drugs covered by the veterans’ health program.
But the Department of Veterans Affairs is able to do this because it’s allowed to deny coverage for drugs whose makers refuse to provide discounts. As a result, between 3,000 of the 4,300 medicines covered by Medicare are unavailable under the veterans' program.
Democrats know that narrow formularies are unpopular, so their plan doesn’t permit Medicare to establish one, but so long as drug-makers know that Medicare has to buy their medications, what’s their motivation to grant a discount?
This week the Congressional Budget Office estimated that savings from direct negotiation would be "negligible."
So it appears, as the Washington Post recently noted, “Not only are the Democrats too optimistic about government negotiation; they are also too pessimistic about the current system in which private insurers administering Medicare drug benefits do the price bargaining. These private insurers stand to profit if they can secure discounts and cut premiums and thus attract more customers: Witness the fact that the average monthly premium has fallen since the program began a year ago. Private insurers can do this precisely because they are free to establish formularies, but market discipline ensures that these lists are not unappealingly narrow. The insurers need to keep customers.”
Moreover, currently Walmart has done a more effective job of negotiating deep drug discounts than has the Dept of Veterans Affairs, or any other government entity.
Is that because government is so inept, or Walmart just so much better at the basic business of providing value to its customers?
See: http://www.washingtonpost.com/wp-dyn/content/article/2007/01/12/AR2007011201885.html?referrer=emailarticle
The hope is that government negotiators could force prices down, and in so doing generate significant savings that could improve and possibly expand the benefit more generous.
But the measure may be misguided.
As a model, the Dems point to the Department of Veterans Affairs, which negotiate discounts for the drugs covered by the veterans’ health program.
But the Department of Veterans Affairs is able to do this because it’s allowed to deny coverage for drugs whose makers refuse to provide discounts. As a result, between 3,000 of the 4,300 medicines covered by Medicare are unavailable under the veterans' program.
Democrats know that narrow formularies are unpopular, so their plan doesn’t permit Medicare to establish one, but so long as drug-makers know that Medicare has to buy their medications, what’s their motivation to grant a discount?
This week the Congressional Budget Office estimated that savings from direct negotiation would be "negligible."
So it appears, as the Washington Post recently noted, “Not only are the Democrats too optimistic about government negotiation; they are also too pessimistic about the current system in which private insurers administering Medicare drug benefits do the price bargaining. These private insurers stand to profit if they can secure discounts and cut premiums and thus attract more customers: Witness the fact that the average monthly premium has fallen since the program began a year ago. Private insurers can do this precisely because they are free to establish formularies, but market discipline ensures that these lists are not unappealingly narrow. The insurers need to keep customers.”
Moreover, currently Walmart has done a more effective job of negotiating deep drug discounts than has the Dept of Veterans Affairs, or any other government entity.
Is that because government is so inept, or Walmart just so much better at the basic business of providing value to its customers?
See: http://www.washingtonpost.com/wp-dyn/content/article/2007/01/12/AR2007011201885.html?referrer=emailarticle
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