January 27, 2016
What The Presidential Candidates Get Wrong about Drug Prices
Presidential candidate and Art of the Deal author Donald Trump recently embraced the idea of having the government (presumably the Secretary of Health and Human Services (HHS)) negotiate drug prices in Medicare. He asserted that “doing so could save $300 billion per year” and that the U.S. currently doesn’t let the government negotiate “because of the drug companies.”
Sorry, 0 for 3. Having HHS “negotiate” won’t save the taxpayers any money. It certainly won’t save $300 billion a year (Hint to Mr. Trump: Medicare Part D spending is only about $60ish billion annually.) And the reason why HHS shouldn’t negotiate is because it does not save money; not because of the drug companies.
But having a “big zero” for a policy does not leave Mr. Trump alone. Presidential candidate and Vermont Socialist Senator Bernie Sanders announced the “Prescription Drug Affordability Act” to control the costs of prescription drugs. Where Mr. Trump used unhinged math, the Senator substituted unhinged rhetoric: “the greed of the pharmaceutical industry is killing Americans and making many of them much sicker than they otherwise would have been.”
But the policy is still the same. Sanders’ bill would allow the Secretary of HHS to negotiate with prescription drug manufacturers on behalf of the Medicare Part D program — something banned by the so-called “noninterference” clause included in the 2003 Medicare Modernization Act (MMA).
And to round out ménage a trois of poor pharmaceuticals policy, Secretary Hillary Clinton endorsed exactly the same idea.
The notion of negotiations by HHS is hardly a new issue. It arose during the passage of the MMA and the Congressional Budget Office (CBO) noted at the time that getting rid of the noninterference provision would have a negligible impact.
This is hardly surprising. Drug companies negotiate annually with prescription drug plans. Those plans go into the negotiations with some strong leverage: millions of customers that could be delivered to the drug company or, faced with too high a price, its competitors. Adding HHS to the mix does not change that leverage. Here’s how such a negotiation would go:
HHS Secretary: I’d like a discount on your prescription drugs.
Drug Manufacturer: What do you have to offer?
HHS Secretary: I can guarantee millions of senior citizens as customers; shouldn’t I get a discount?
Drug Manufacturer: Sorry, the prescription drug plans have already guaranteed us the customer base and we’ve given them the discounts. What else have you got?
HHS Secretary: Uh, a used copy of healthcare.gov ?
Drug Manufacturer: We are done here.
The essence is that the private sector prescription drug plans already have all the market-based leverage available. Of course, there is one thing that the government can do that the private sector can’t: price controls. For that reason, one usually suspects that a call to repeal the noninterference clause is really just government price-fixing in disguise. Price-fixing never works, and price-fixing in one sub-market like Medicare typically has negative fallout more broadly.
Advocating government price controls would be a surprising position for a Republican, even one as thin and ungrounded on policy issues as Mr. Trump. But even restricting the proposal to calling for government negotiations is poor policy. It’s not about the art of the deal. It’s about the math. Insurance companies offering drug coverage through Part D negotiate directly with manufacturers to get the best price they can. A lower price benefits the prescription drug plan directly, but it also allows it to lower premiums to attract seniors. Having lots of seniors gives the drug plan leverage to negotiate lower prices with drug manufacturers looking to build their market share. There is nothing the government can do to improve on that math.
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