The U.S. Senate is debating S. 3 today, which would remove the prohibition on the federal government negotiating prescription drug prices covered by Medicare. Once you get beyond the sound bites — use the power of the government to force drug companies to lower prices — you get to the economic realities of the legislation, which is, either it does nothing, or it does great harm.
Greg D’Angelo of the Heritage Foundation provides a clear explanation of the legislation’s policy fallacies and their inimical results in this paper, “The Medicare Fair Prescription Drug Price Act of 2007: A Step Towards Government Interference. Key passage:
Although the competition in Medicare Part D is impressive and the news keeps getting better, some in Congress are eager to interfere with this private sector model. If government were to meaningfully interfere with private negotiations between drug manufacturers and private plans, it would have to be willing and able to move market share, because bulk purchasing alone is insufficient to secure price discounts.
As CBO Director Peter Orszag explained after the passage of H.R. 4, the House’s price negotiation bill, “Just showing up and saying ‘we’re from the government and would like a lower price’ doesn’t help very much.” For the government to move market share, it would have to impose a government formulary or pricing structure or some other regulatory regime. Its interference would necessarily become an exercise of government power to control prices, directly or indirectly, and exclude from the market any drug offered at a higher price. In turn, this would result in a one-size-fits-all Medicare benefit that would preclude competition between private plans and replace consumer choice with decisions handed down by Washington bureaucrats.
The NAM has made S. 3 a “key vote,” one of the many used to determine a legislator’s ranking on manufacturing issues. In a letter sent to Senators yesterday, NAM Vice President Jay Timmons argued that Medicare reforms are already working to make prescription drugs more affordable to Medicare recipients.
The 2003 Medicare Prescription Drug and Modernization Act (MMA) called for reform through private plan options that rely on competition to drive down costs — a concept the NAM and its members have long embraced. Private sector negotiations between insurers and manufacturers since passage of the MMA have steadily driven down Part D premiums from $32 to $24. Retirees appear to be very pleased with the current system.
A compelling case has not been made to overhaul a process that appears to be working. Conversely, allowing the government to negotiate one-size-fits-all solutions could result in higher prices for seniors and our retirees, reduce the array of available drugs and reduce funding for research and development of new drugs that can benefit those who are ill.
The Senate bill has been watered down just a bit from the House version, H.R. 4, just lifting the prohibition on negotiations instead of mandating them, as per the House. But to what end, unless the goal is to expand government involvement in drug pricing? Lawrence A. Hunter of the Institute for Policy Innovation, in a politically oriented take on the issue, says Senate Minority Leader Mitch McConnell should make sure to kill the bill before President Bush’s promised veto becomes necessary.
We’re not so concerned about the politics, but the end result: The bill dramatically expands government’s control of an important sector of the economy and would lead to fewer drugs and less innovation in the pharmaceutical industry. Like doctors, Senators should be guided on this issue by the Hippocratic Oath: First, do no harm.
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