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News for the week of 11-13-2006

Administration Opposes Democrat’s Plan For Negotiating Medicare Drug Prices
The New York Times, 11-13-06

Editor's Notes:

Incoming House Speaker Nancy Pelosi has announced that "in the first 100 hours" of the next Congress, she will push legislation requiring the Secretary of Health and Human Services engage in direct price negotiations for medicines purchased under the Medicare Drug Benefit. The President has already declared this to be a nonstarter. This article from the Times offers a concise summary of the arguments that both sides will likely deploy:

In an interview, Michael O. Leavitt, the secretary of health and human services, said he saw no prospect of compromise on the issue.

"In politics," Mr. Leavitt said, "most specific issues like this are a disguise for a larger difference. Government negotiation of drug prices does not work unless you have a program completely run by the government. Democrats say they want the government to negotiate prices. What they really want is government–run health care."

Federal price negotiations would unravel the whole structure of the Medicare drug benefit, which relies on competing private plans, Mr. Leavitt said.

Dozens of plans are available in every state. They charge different premiums and co–payments and cover different drugs. The 2003 Medicare law explicitly prohibits the federal government from negotiating drug prices or establishing a list of preferred drugs.

Representative Nancy Pelosi, the California Democrat who is in line to become the House speaker, has said the House will take up legislation to repeal that ban in its first 100 hours under Democratic control. Senate Democrats have expressed a similar desire. The eight Democrats newly elected to the Senate all say Medicare should have the power to negotiate with drug makers.

"The government negotiates big discounts for the prices of drugs for our veterans," said Senator–elect Amy Klobuchar of Minnesota. "But the drug companies got Congress to make it illegal to negotiate for lower prices under Medicare."

Secretary Leavitt said he did not want the power to negotiate drug prices. "I don't believe I can do a better job than an efficient market," he said.

"We are seeing large–scale negotiations with drug manufacturers, but they are conducted by private drug plans, not by the government," Mr. Leavitt said. "A robust marketplace with a lot of competitors has driven down prices. It's the magic of the market. To assume that the government, in our genius, could improve on this belies the reality of a complex task."

Government can, in fact, lower prices, but it will take more than just "negotiations." It will take a single Medicare formulary that government can use to bargain for steep price concessions from companies jockeying for access to the enormous Medicare market. However, creating a single formulary may also invite a backlash from seniors worried about having their drugs excluded.

Would a single Medicare formulary help control overall Medicare costs? It is hard to see how it would. For years, price controls have been in place in Medicare and Medicaid reimbursements for physicians and hospitals, yet both of those programs are fiscally unsustainable.

The problem, after all, isn't so much the price of services per se, but all those pesky sick people; Medicare beneficiaries with multiple chronic conditions account for the vast majority of Medicare spending. Chipping away at prescription drug prices may slow spending at the margins, but it’s not going to fundamentally change the price tag required to treat millions of obese diabetics with high cholesterol.

Our competitors in Europe may spend less per capita on health care than we do thanks to more aggressive health care rationing, but they are facing the same predicament: health care spending is increasing at an unsustainable clip. Arguing about prescription drug prices isn't going to solve any of our real problems, and more government intervention in health care markets might just make them more dysfunctional than they already are. Perhaps it is time to see if a strong dose of capitalism can cure health care.

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