Take the legislation just introduced in the House and Senate by Representative Lloyd Doggett, D-Texas, and Senator Sherrod Brown, D-Ohio, respectively. Their “Medicare Negotiation and Competitive Licensing Act” is designed to reduce costs by fundamentally altering the highly successful financing structure of Medicare Part D, the prescription drug benefit for seniors.
Under their proposal, the federal government would step in to negotiate prices directly with drug makers. The idea is that the government, with its vast buying power, can get a better deal than private payers. It’s a common sound bite.
Unfortunately, even the government’s own bean-counters don’t think there’s any savings to be realized this way. And the unintended consequences of the Doggett-Brown proposal are even worse: Limiting therapeutic choices for seniors and gutting incentives for investors and researchers to develop the next generation of groundbreaking cures.
Medicare Part D is very popular among American seniors, and rightly so.
Under the current structure of the program, private-sector insurers negotiate directly with drug makers on the price of their products for inclusion in insurance plans.
Insurers pass these discounts on in the form of lower premiums. Seniors then choose from a wide variety of private-sector insurance plans and can usually find the one that best meets their individual needs.
By law, the government currently has to stay out of the price negotiations between insurers and drugmakers. The first thing the Doggett-Brown legislation does is lift this restriction, known as the “non-interference clause.”
But there’s a problem here. First, the government is unlikely to be able to get better prices from drug makers than insurers are currently obtaining. That’s the conclusion of both the Congressional Budget Office and the Office of the Actuary of the Centers for Medicare and Medicaid Services. Insurance companies already have an incentive to drive hard bargains, and drug makers go along within the constraints of maintaining the viability of their businesses.