One perennial proposal to reduce health care costs has been to have the federal government negotiate drug prices with pharmaceutical manufacturers. Various types of negotiation proposals have emerged over the years, from both Democrats and Republicans (but more often Democrats) and covering various portions of the health care sector, ranging from federal purchases to Medicare to the entire nation’s pharmaceutical use.
Anyone familiar with federal and state governments’ track record in saving money through negotiations should immediately be skeptical of this sort of proposal. Cost over-runs in military procurement are legendary, and higher prices for government-negotiated prices for infrastructure projects go back at least two centuries, to the contract for the Erie Canal in the early 1800s.
In the case of pharmaceuticals, the record is no better, and quite possibly worse. In 1990, Congress pass a law requiring Medicaid programs to get the best prices for prescription drugs offered to any private payer, or 15 percent off list price, whichever was lower – and estimated that the federal and state governments would save $3.3 billion over five years by getting the best discounts any private payers had been getting. Faced with the options of giving deep discounts to the then-largest single buyer of prescription drives, or offending smaller entities payers by revoking their discounts, drug companies responded by reducing discounts overall. The Medicaid savings never really materialized, and private payer discounts dropped to – guess what, about 15 percent off list price.
More recent proposals relate to Medicare Part D plans. In Medicare Part D, private non-profit and for-profit health insurance companies bid to provide prescription drug coverage for Medicare beneficiaries, and separately negotiate prices with pharmaceutical companies (along with providing other prescription-related services). The incentive for Part D plan sponsors to negotiate lower prices comes from the fact that they can then reduce their premiums to Medicare beneficiaries and thus attract more customers.
The competition between Part D plan sponsors produced spectacular savings. By 2012, total Part D costs were actually 57 percent below the original forecast. Because the taxpayer subsidy depends on the bids submitted by plan sponsors, this competition benefits not only Medicare beneficiaries, but taxpayers in general.
One would think that this success would lead to proposals to replicate the features of Part D in other government programs. Instead, there are calls to change Part D, substituting a federal government’s negotiation of a single price structure for plan’s individual competitive negotiations. In other words, the government should “save money” by buying prescription drugs the way they buy aircraft carriers.
Indeed, a recent report from the National Academy of Sciences, after acknowledging that previous federal attempts to reduce drug prices have had the opposite effect, nevertheless recommends that the federal government “directly negotiate” prices for all federal health care programs that pay for medications, plus any state or local government programs that choose to use the federal price list.
Proponents neglect the possibility – which based on past experience, is a very likely outcome – that federal negotiations could increase drug prices rather than reduce them. They also neglect the possibility that by insisting on prices that are too low, the government might make certain drugs simply unavailable.
As I explain in more detail in this report, the government is in the position to make a “take-it-or-leave-it” offer to drug manufacturers which, if rejected, could lead to the drug becoming unavailable to every patient in a government health care program. This sets the stage for political conflict, in which patients and drug companies lobby for higher prices to ensure that drugs remain available, while other patients dependent on the same health care dollars for non-drug purposes lobby for lower prices, and taxpayers are left with the bill.
In addition, drug development is expensive. Suppose the federal government manages to force prices down to a level just necessary to keep drugs available, but not high enough to allow for much profit. Drug companies are sure to take that into account when deciding to invest huge amounts of money in developing new drugs and shepherding them through the FDA approval process. And, investors are even more sure to take that into account when deciding whether to fund drug companies – either small startups or longstanding giants.
Artificially depressing prices is a sure way to depress future research and the stream of new treatments. That will, of course “save money” in the future – imagine having no new, patented drugs to pay for! – but at the cost of human lives.
We need to acknowledge that saving lives is more important than saving money – and if history is any guide, federal regulation of drug prices will not even save money.
