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Letting Medicare use its bargaining power would send a strong message that drug prices are unsustainably high
The AARP weighs in with its support for drug price negotiations in the Medicare drug benefit, a position with which we disagree—but one held by many policymakers. But the AARP also recognizes that the VA model is not a good one for seniors.
Advocates argue that aggressive bargaining by the government can reduce costs, pointing to the low prices the Department of Veterans Affairs negotiates with drug companies as proof. But analysts on both sides of the issue say invoking the VA model is misleading because the VA covers far fewer drugs for far fewer beneficiaries.
We would respectfully argue, however, that the AARP is trying to have its cake and eat it too. Negotiations entail the possibility that one or both parties can walk away from the table. Medicare drug benefit negotiations would have no meaning without the ability of the government to exclude drugs from a national formulary. Companies could, of course, refuse to sell to Medicare, but given that Medicare accounts for the lion's share of the nation's prescription drug market, and companies need to recoup at least some of their sunk costs, this is highly unlikely. In short, negotiations require a formulary, and the government's monopsony power would transform negotiations into de facto price controls.
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