Medicare Drug Plan – Is Government Interference Necessary?
Families USA is a national nonprofit, non-partisan organization dedicated to the achievement of high-quality, affordable health care for all Americans.
They just issued a Report as House of Representatives Is Scheduled to Vote Soon to End Prohibition Preventing Medicare from Bargaining for Lower Drug Price that shows Medicare Drug Plan Prices Are 58 Percent Higher than VA Prices
For all of the top 20 drugs prescribed to seniors, VA prices were substantially lower than the lowest prices charged by the Part D insurers, according to the report. The median price difference was 58 percent. In other words, for half of the 20 drugs, the lowest price charged by the Part D insurers was at least 58 percent higher.
“Opponents of Medicare bargaining make two contradictory claims. First, they claim that private market competition under Part D is more effective in reducing prices than Medicare bargaining; and second, they claim that Medicare bargaining would reduce prices so significantly it would harm research and development,� said Pollack. “These arguments cannot both be true—and, indeed, neither is true.�
Using numbers the major drug companies have publicly submitted to the Securities and Exchange Commission (SEC), the Families USA report rebuts the assertion that Medicare bargaining would harm research and development (R&D). According to the report, the largest U.S.-based drug companies spent more than twice as much on marketing, advertising, and administration as they spent on R&D (13.9 percent versus 32.0 percent of revenues), and they retained more in profits than they spent on R&D (17.4 percent versus 13.9 percent).
In 2005, for example, Pfizer spent 2.3 times as much on marketing, advertising, and administration as on R&D (33.1 percent versus 14.5 percent of revenues). Merck spent 1.9 times as much on marketing, advertising, and administration as on R&D (32.5 percent versus 17.5 percent of revenues). Abbott Laboratories spent 3.0 times as much on marketing, advertising, and administration as on R&D (24.6 versus 8.2 percent of revenues). The Families USA report’s pricing data were for November 2006 as reported by Part D plans to the Centers for Medicare and Medicaid Services (CMS), as listed on the CMS Web site (www.medicare.gov). VA pricing information was obtained from the VA’s price schedules.
I think that the government should let market forces determine the lowest prices on goods and services. And intervene only when there are obstacles to free markets. Allowing the government to impose prices is a last choice..
But what most interests me is why the five companies with the largest enrollment in Medicare Part D are not able to negotiate prices as low as the VA can? Are they not allowed to work together? Are they being played off of each other by the Drug companies? How is the free market kept from working?
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23 Responses to “Medicare Drug Plan – Is Government Interference Necessary?”
AARP supports the DEMS on this issue. (let me put my progressive hat on) Just look at all the money AARP is making on the Part D insurance. The real question is – Are the insurers passing on the negotiated rate or holding some back?
Paul, I think I’ll have to come back later and re-read this. I’m not quite sure I follow your last two paragraphs here. Specifically, is Medicare Part D really part of the free market system if it can’t negotiate drug prices? And then can you explain this sentence better,
maybe I’m just reading it wrong but why would drug companies be negotiating lower prices? The gov’t and/or medicare are the ones that need to negotiate lower prices on behalf of those using medicare drug plans aren’t they? As it appears the VA is doing for it’s members.
I think the free market isn’t in play here specifically because the govt or medicare can’t negotiate at all. At least that is my understanding of it, maybe other readers that are more experienced with this issue can chime in. I’ll definitely come back later to read comments.
Hopefully people more informed will comment.
My understanding is that each of the companies offering insurance negotiate prices on behalf of their customers. They offer a particular formulary and a price structure.
Apparently the top five companies represent 65% of those covered under Plan D.
I’m not an expert, but from what I understand, the insurance companies you mention can’t negotiate prices as low as the VA because the VA actually represents a bigger pool of beneficiaries. Volume discount, short and simple.
I tend to agree with one of the other commenters: When the government makes a purchase, or has reason to make one, it participates in the free market and the free market benefits from a new buyer. Why the free market should be open to private entities but not governments wishing to make purchases baffles me. In short, I support the direction in which the Dem’s are headed, though there are obviously many details to work out, including whether or not negotiations can exclude certain drugs from the approved “buy list.”
I posted on this a while back at CS, linking to two articles that lay out some of the pros/cons: http://centralsanity.blogspot.com/2007/01/of-concern.html
Hope they are helpful.
The pharmaceutical industry is second only to energy industry as donors to Republican political campaigns (and now, no doubt, Democrats), and they’re among the largest advertisers, thus exerting undue influence on coverage. Much of those R&D costs are already tax funded.
For example, look at the chemo drug, Taxol. NIH researched it, FDA allowed it to be approved as an “orphan drug” by pretending it was only going to be used for cervical cancer. Bristol Meyer Squibb holds the patent, keeps the profit, charges what they want, then gets the media to say if we negotiate the price down it will cripple drug company R&D.
I’m a big proponent of honest free enterprise, but most free-marketeers are really ignorant of these kinds of manipulations of the public and abuse of taxpayer dollars. I see it all the time, and nowhere more devious than this attempt to keep us from getting the best prices for our tax dollar supported purchases. We play a huge role in making these companies profitable. There’s no excuse for their manipulation to keep us from getting the same prices that they willingly offer to others, including the VA, Canadian and European buyers.
The top 5 Plan D insurers control 65% of the market. Why is it that they can not come close to achieving what the government could negotiate on our behalf? Are they not allowed to work together?
Toward the end of each fiscal quarter, pharma reps have a fire sale of cheap drug prices to Canada to pump up the quarterly sales numbers. Then they and the GOP noise machine demonize Americans who want to buy these drugs from Canada, or buy them at the prices for which the Drug Co.s willingly sold them. One of the posts on here earlier talked about the US “subsidizing” Canadian and European buyers. This is a deception. Drug companies can be quite profitable selling for the prices they offer to other buyers. It’s like the adage says “you don’t get what you deserve. You get what you negotiate.” Let our Medicare system negotiate as fiercely as they can. Big Pharma can take care of themselves, believe me.
“I think that the government should let market forces determine the lowest prices on goods and services.”
Right,And accordingly, the VA administration for example doesn’t force drug suppliers to sell their drugs at artificially low prices, but instead at the lowest prices they sell their products on the open markets. The companies have total control about the prices of their goods. And at the same time the Veterans get the best deal that the market has to offer, only fair imho. Plus it greatly reduces the opportunity for corruption in the VA administration. Everything is transparent and can be checked by the oversighting instances. What exactly is the problem some conservatives have with this procedure?
Gray,
The missing piece in that analysis is that Europe and Canada aren’t buying drugs at market prices. Their govt’s enforce price controls. That’s why the US market then pays all the R&D cost.
Actually not, GD. The fixed price of drugs in Europe and Canada is formulated on cost plus normal profits, not cost plus normal profit and R&D cost (or put another way, not allowing the higher profits that lead to investment in the industry). Do you really think the same amount of money will flow to pharmaceutical company stocks if the yield were comparable to an industry with lower risk?
It’s always amusing to read posts from people who think that the market does all those wonderful things that theory calls for in the days of modern publicly held corporations with the demands of Wall Street and over-paid executives. Faith is such a powerful force.
“The missing piece in that analysis is that Europe and Canada aren’t buying drugs at market prices. Their govt’s enforce price controls. That’s why the US market then pays all the R&D cost.”
CS, sry, but that’s just a rumour. In fact, at least in Germany, drug costs are higher than in most other countries. German governments always tell the public there can’t be price controls since the high prices are necessary to pay for R&D costs, which can’t be retrieved in other national markets…
I always wonder about the validity of that argument, since many of our pharmaceutical corporations are part of multinational corporations, based in other parts of the world, nowadays. What’s the german interest in subsidizing R&D costs for the rest of the world?
Imho this has more to do with strong pharma lobbies than with real problems financing the R&D of new drugs.
“The fixed price of drugs in Europe and Canada is formulated on cost plus normal profits, not cost plus normal profit and R&D cost (or put another way, not allowing the higher profits that lead to investment in the industry).”
Now, come on, CS, where did you get this info? What european nation are you talking about?
Gray,
Many Europeans nations, along with Canada and Japan, have these price controls in effect. Just because Germany might be an exception doesn’t mean that this is just a “rumour”, but I’ll try to find some sources to verify this and I’ll come back and post.
Here you go, Gray: Europe’s Addiction, from the WSJ 1/2/02.
By the way, I also found the answer to your query about why Germany abandoned some of their price controls here:
“Europe’s Addiction, from the WSJ 1/2/02.”
That’s an opinion piece, CS! Apart from the questionable calue of the WSJ opinion section (a hotpot of lobbyissts and administration officials, imho), these articles are not fact checked! I’m sure I could find a rebuttal if I searched Brad DeLong’s site, for instance.
Gray,
You’re suggesting that they completely made this up?? That there are no price controls? What facts are you doubting? Why do you think prices are lower in these countries?
“by correctly abolishing the reference price for patented drugs, more research is now taking place.�
This seems to be a quote about the “Festbetragsregelung” (fixed amount provision), that sets maximum prices for reimbursement of drugs containing certain substances by health insurance companies (there are several hundred of them, there isn’t a nationalized sstem). This doesn’t dictate any prices to the industry, it just says that the insurers only have to reimburse a fixed amount for a drug containing a substance (or a combination of substances) that’s on the list. New drugs are excempt from this regulation, in order not to hamper progress (that’s what the part about patented drugs is about).
The idea is to provide an incentive for the customers to not chose the most expensive drug when thre is a choice of several products with the same effect. The customer may still chose the most expensive one, of course, but he has to pay the difference to the regulated maximum price then (on the other hand, our system doesn’t know your ‘donut hole’). This provision resulted in a significant reduction of costs for german health insurance companies. But this is not at all the same as setting a fixed price for a drug! Another glaring example that a columnist may prove everything if he takes quotes out of the context and leaves the readers in the dark about the proper circumstances.
I suggest you read this study, CS, which gives an interesting comparison. Page 9 may be especially interesting.
“Why do you think prices are lower in these countries?”
Imho the higher prices in the US are the result of an intransparent market (which doc really knows all the drugs and their price/value ratio?), marketing divisions ‘bribing’ those responsible for prescribtions, and a highly effective and successful drug lobby.
Gray,
Honestly, I don’t understand your point. Did you not object to my assertion that most other countries practice price control? And then you give me a reference to a paper by the Canadian “Patented Medicine Price Review Board”? Do you, or do you not, believe that price controls are in effect in other developed countries?
From the Washington Post:
The Democrats bill leaves intact three provisions of the 2003 law that industry analysts agree played a more direct role in boosting pharmaceutical profits. These include a controversial ban on the importation of cheaper medicines from Canada, a provision that forces roughly 7 million Medicaid patients to buy drugs that are not subject to price limitations, and provisions requiring private insurance plans to remain small and numerous, which dilutes their leverage in price negotiations with drugmakers.