We all know that when we buy things in bulk, we can save money. Economic theory and our own shopping experiences are that sellers are much more likely to give the consumer a break on the per-item cost if the consumer buys more of them.
Over the long haul, buying in bulk can save real money.
And that’s what government can do. Governments are the biggest purchasers of health care – both through public programs like Medicare (health insurance for seniors), Medicaid (health insurance for lower income individuals) and through health coverage for public employees.
At the federal level, the government currently negotiates drug costs for veterans (through the Veterans Administration) and Medicaid beneficiaries. Yet, because of a federal law passed in 2003, the government is specifically prohibited from negotiating for Medicare drug prices.
That prohibition was part of a deal that expanded drug coverage to seniors. The 2003 Medicare Prescription Drug, Improvement, and Modernization Act expanded the Medicare program by creating a voluntary prescription drug benefit known as Part D. The benefit took effect in 2006 and provided prescription drugs through private stand-alone drug plans and Medicare Advantage plans.
However, as part of the deal and to sweeten the benefits for pharmaceutical companies, that law prohibited the Secretary of Health and Human Services (HHS) from negotiating Medicare drug costs.
Instead, Medicare prescription drug prices are negotiated between prescription drug manufacturers and hundreds of insurance companies that administer Part D plans. Of course, insurance companies have some clout, but it is nothing compared to the negotiating power of the federal government. As a result, Medicare drug costs are higher – and seniors must pay more.
Generally, those who support allowing the federal government to negotiate for lower Medicare prescription drug costs argue that Medicare beneficiaries should receive the same lower prescription drug prices that veterans and Medicaid beneficiaries receive. Specifically, establishing the government as the single negotiating entity, instead of thousands of individual private plans, would result in significantly lower prices for beneficiaries and reduce program costs.
Opponents argue that doing so would be a form of price control that would interfere with market competition. They also cite concerns that a reduction in prescription drug manufacturers' profits may result in less money for researching and developing new drugs. Opponents ignore the facts that drug therapy research is often conducted using taxpayers’ dollars and that allowing the Veterans Administration and Medicaid to negotiate drug costs has not impacted the pipelines for new medicines.
Since passage of the 2003 law, there have been numerous unsuccessful attempts to allow the federal government to negotiate Medicare drug prices, in the same way it does now for veterans. That fight has reached a new peak as part of the Congressional debate over the Biden Administration’s Build Back Better Act, the proposed $3.5 trillion stimulus program.
The President’s plan is central to the Congressional budget reconciliation debate. Under Congressional rules, budget reconciliation proposals merely require majority approval in the U.S. Senate – circumventing the filibuster obstacle that requires 60 votes to end debate on policy-focused bills. Measures considered under budget reconciliation must be narrowly tailored to the implementation of the federal budget. A plan to change the nation’s immigration policy, for example, has been barred from budget reconciliation since that plan was more policy than budget.
However, when it comes to Medicare drug costs, the plan to allow the government to negotiate for lower costs is far more compelling. The nonpartisan Congressional Budget Office has estimated that allowing Medicare to negotiate prices would save government health plans more than $450 billion over 10 years. And those savings clearly make sense as part of a multi-trillion-dollar budget plan.
Of course, the benefits would not be to the government alone. Lower drug prices would result in lower costs for Medicare beneficiaries. Under drug price negotiation, Medicare beneficiaries would see a savings from an estimated 9% of the Part D base premium in 2023 to 15% in 2029. The lower prices would benefit the more than 45 million Americans who participate in Medicare prescription coverage.
As the Congressional debate over budget reconciliation and the Biden plan unfolds, making sure that seniors benefit from lower drug costs and the government saves hundreds of billions of dollars must be a top priority. The financial health of the nation – and the health of seniors – hang in the balance.
Blair Horner is executive director of the New York Public Interest Research Group.
The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.