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Medicare D - The Drug Price "negotiation" farce
Posted by: McQ on Tuesday, April 10, 2007

OK, you're immediately asking yourself, why did he put "negotiation" in scare quotes. I'll get to that.

But first things first. Coming to the Senate very soon:
A bill permitting the government to negotiate with pharmaceutical companies for lower prices in the Medicare program is likely to be considered in the Finance Committee as soon as this week, Sen. Max Baucus (D., Mont.) confirmed. He declined to discuss details of the bill, which could come up Thursday, but has in the past stated his support for revoking a prohibition in the law that bars the government from interfering in negotiations between the private insurers that operate the drug coverage and manufacturers.

Many Democrats say private companies have too much power in the privately run benefit, and want to shift more leverage to the government, which is paying most of the costs.

The House already passed legislation requiring the government to negotiate with drug companies, inflaming the industry, which nonetheless said the move wouldn’t have the desired effect of lowering prices without restricting patients’ access to medications.
Just those hightlighted sentences alone should scare the daylights out of you. But note the promise: "lower the price" of pharamaceuticals (drugs) "without restricting a patients' access to medications."

Or said another way, all drugs available to everyone in Medicare for a lower price and your good old government is going to see to it by shifting "more leverage to government". Why?

Well again, those loaded few paragraphs give us the answer: "private companies have too much power in the privately run benefit".

Got it? Less private, more government and everything will be available and at a lower price. Why? Because those private companies don't have the bargaining power of the government, that's why.

Really?

Well, no:
Even more importantly, Part D has proven that enhanced competition and choice can dramatically reduce costs.

When Congress created Part D, the delivery of prescription benefits was left to private insurance plans which must compete for a share of the market. Competition puts pressure on the plans to negotiate hard for low drug prices, to encourage the use of more cost-effective pharmaceuticals, and to offer affordable premiums.

Despite initial skepticism from political opponents, the competition strategy has succeeded beyond all expectation. The average Medicare beneficiary has more than 50 different Part D plan choices. More importantly, seniors and taxpayers are saving money. Premiums averaged just $24 a month in 2006, one-third lower than experts had predicted.
With no government price negotiation in sight, those nasty old private companies who were competing for the dollars of the Medicare recipients worked very hard to provide the most bang for the buck by negotiating drug prices down for their particular company and potential customers. The results are there to see.

So, if as Sen Charles Grassley says about the present Medicare D system, "if it ain't broke, don't fix it", why are Democrats planning on messing with something which seems to be working?

Let's defer that question for a minute (although I'd bet most of you already have an answer) and look at a few facts. First, according to the Congressional Budget Office, giving the government the power to negotiate with drug companies would have little if any effect on drug pricing. In a letter to Rep. John Dingell the CBO said:
H.R. 4 would require the Secretary to negotiate with drug manufacturers the prices that could be charged to PDPs [Plan Drug Providers (the private companies)- ed.] for covered drugs. However, the bill would prohibit the Secretary from requiring a particular formulary and would allow PDPs to negotiate prices that are lower than those obtained by the Secretary. The bill would also require the Secretary to report to the Congress every six months on the results of his negotiations with drug manufacturers.

CBO estimates that H.R. 4 would have a negligible effect on federal spending because we anticipate that the Secretary would be unable to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained by PDPs under current law.
Do you begin to understand Grassley's point? If not, read that last sentence again.

The point about the use of a formulary, or in this case the prohibition of a formulary, is critical. One of the programs that Democrats like to point to that has been successful in lowering drug prices is the VA. But the VA uses a formulary which restricts the drugs in its system to 1300. Consequently it negotiates only for those drugs with companies and has the option of competitors drugs if a certain pharma corporation won't make a better deal. Then VA buys and distributes those drugs exclusively.

A private example of that is Wal-Mart and the 400 generics it now sells for 3 to 4 dollars. Obviously you have to be on those medications, but if you are, you're able to take advantage of their buying power.

What is the federal government talking about doing? Well they're talking about negotiating pricing on the full 4,300 drugs available. But what leverage do they bring to the table to get drug pricing down? Without a formulary, there is no leverage. And this law prohibits a formulary.

So the "negotiations" would go something like this:

Govt: "If you'll lower the price of your drugs we'll buy all of them from you".

Phrama: "Yeah, and if we don't who'll you buy them from?"

End of negotiations.

You see, this only works with a formulary, and the Dems have already promised that they're going to get the pricing down on all drugs. IOW, they shot their negotiating position in the head by making that claim.

So what does that leave them as options for actually lowering the price of drugs across the board?

Well, not negotiation, that's for certain. But there are always price controls, aren't there? And anyone familiar with Medicare knows that is how it works:
Medicare Part B - which covers outpatient services - pays for prescription drugs that are not usually self-administered, such as a tetanus shot.4 Medicare does not bargain with the sellers of these drugs to arrive at the price it will pay. Rather, Medicare bases its payment on the average price of the drug in the private sector. Specifically, as the U.S. Department of Health and Human Services has described the process, "the Medicare reimbursement amount for a covered drug is 95 percent of the drug's average wholesale price (AWP). Of this amount, Medicare pays 80 percent while the beneficiary is responsible for a 20 percent co-payment."

The term for this is not "negotiation." It is "price control." If that's what the proponents of this Medicare "reform" want, then they should be open and honest about it.
So how will that increase drug prices? Exactly the same way Medicare has increased health insurance costs. By paying below market fees based on an 'average' price in the private market. How does a physician or pharmacist recover the loss imposed by government? Easy:
The reduction in drug prices for Medicare will be the "seen" effect. The subsequent rise is drug prices in the private sector, however, will be the "unseen" effect. Drug prices will rise in the private sector because drug companies will want to maximize the price they receive from Medicare. The price Medicare will pay will be based on the average price in the private sector. So, the higher prices are in the private sector, the greater the average price will be. The higher the average price, the greater the reimbursement the pharmaceutical company will receive from Medicare.
Got that?

So let's review quickly so everyone understands why the word "negotiation" is in scare quotes in the title and why that's important.

Democrats want to give the federal government, in the guise of Medicare, the power to "negotiate" lower prices with the drug companies. But in reality the federal government, lacking a formulary, has no leverage to wield in a negotiation. So, in fact, the outcome will be the government declaring how much it will pay (defacto price controls) for Medicare patient drugs based on the average price in the private sector. That will drive the cost up in the private sector as pharmaceutical companies try to recover the loss from Medicare and the upward cost spiral which the government is responsible for in medical care delivery now will also find its way into the pharmaceutical market.

And the government will then blame the greedy drug companies while you, in the private sector, pay increasing insurance rates and more for drugs.

Sound like a good plan to you?
 
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And the government will then blame the greedy drug companies while you, in the private sector, pay increasing insurance rates and more for drugs. Sound like a good plan to you?
It sounds like a lousy plan to me, but to the people who brought you 500-dollar toilet seats, bridges to nowhere, and the Katrina fiasco, it probably sounds like nirvana. Eventually the Government will have to control your medical choices, following the “Golden Rule” he who has the gold rules. That will be another step towards “A People of the Government, by the Government and for the Government.”
 
Written By: James E. Fish
URL: http://faroutfishfiles.blogspot.com/
So the "negotiations" would go something like this:

Govt: "If you’ll lower the price of your drugs we’ll buy all of them from you".

Phrama: "Yeah, and if we don’t who’ll you buy them from?"
I agree completely, and just curious, how do you see the best way to reduce drug prices? Seems to be the best way is to allow importation of drugs from Canada and Europe, it gives the Govt (or private companies) an answer to Pharma’s tough question.

However, I think your a bit doomsday here:
That will drive the cost up in the private sector as pharmaceutical companies try to recover the loss from Medicare and the upward cost spiral which the government is responsible for in medical care delivery now will also find its way into the pharmaceutical market.
I think it probably will result in slightly higher private sector bills, but it’s not a runaway phenomenon. Pharma wants to make x dollars of profit, this bill just shifts the percentage of that profit from the public to the private sector.

Also, from a low taxation standpoint this bill is a good thing. If the government can save money on costs, it should be either able to reduce taxes or deficits.
 
Written By: Kevin H
URL: http://
However, I think your a bit doomsday here:
Kevin, look at the mechanism for pricing which Medicare uses and will most likely use for part D if they get their hooks into drugs.

If Medicare will only pay a set price based on the average cost in the private sector, how do you raise what Medicare will pay?

That’s right, raise the average cost in the private sector. How do you do that? Raise prices on medical care which in turn raises prices for insurance, which in turn raises the average price, meaning Medicare now pays more since the average is higher.

Wash, rinse, repeat. That’s exactly how and why medical costs have spiraled higher. Then, as noted, the government loves to blame the "greedy health care companies" when it is government Medicare and Medicaid policies driving the cost spiral.
Also, from a low taxation standpoint this bill is a good thing. If the government can save money on costs, it should be either able to reduce taxes or deficits.
But money is already being saved by the PDPs who are presently negotiating drug prices and have the average cost of the part D premiums at 1/3 below what was projected.

And the CBO says this bill will have "would have a negligible effect on federal spending because we anticipate that the Secretary would be unable to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained by PDPs under current law."

So where is the savings?
Seems to be the best way is to allow importation of drugs from Canada and Europe, it gives the Govt (or private companies) an answer to Pharma’s tough question.
I don’t care where the drugs come from in a private free market. But right now they’re not coming from Canada and Europe because government won’t let them in. Instead of this legislation, why don’t they get out of the way and let them in?
 
Written By: McQ
URL: http://www.qando.net/blog
Other governments can negotiate at-cost prices from drug companies because they will block the sale of that drug if they don’t agree to that price. And this only works because the cost of overhead, R&D and profit get pushed back onto the US market.

Our government will never turn off the spigot due to the outcry and political backlash. Also there’s almost no one left to push the cost of R&D, overhead, & profit onto.
 
Written By: jpm100
URL: http://
Other governments can negotiate at-cost prices from drug companies because they will block the sale of that drug if they don’t agree to that price
There is a name for that tactic, Blackmail, it only works for a short time. Eventually the chump wises up and tells you where to stick it. No Government will survive long if their citizens are dying because they won’t allow them the drugs they need.
 
Written By: James E. Fish
URL: http://faroutfishfiles.blogspot.com/
I believe Canada also has a formulary, which could explain their lower prices..."Give us a great price or you don’t get on the list."

Government tends not to negotiate very effectively in my experience. My twelve person company in Taiwan had much better FedEx rates than the State of California. We’d shopped our business around to get the best deal. I have no idea what California did, but they were paying 30% more.



 
Written By: Harun
URL: http://
Eventually the chump wises up and tells you where to stick it. No Government will survive long if their citizens are dying because they won’t allow them the drugs they need.
Unfortunately, if the drug really is a lifesaver, as opposed to a life-enhancer (say, Cipro as opposed to Viagra), then the foreign government has another option: ignore the patent and allow their own or some third-country pharma company to supply the drug. The drug company will usually cave when this is threatened because the consequences are MUCH worse than making little-or-no profit on overseas sales of the drug.
 
Written By: Terry
URL: http://
So the "negotiations" would go something like this:

Govt: "If you’ll lower the price of your drugs we’ll buy all of them from you".

Phrama: "Yeah, and if we don’t who’ll you buy them from?"
Think you missed the next line:

Govt: "Nice patent you had."

 
Written By: Ryan
URL: http://
the foreign government has another option: ignore the patent and allow their own or some third-country pharma company to supply the drug.
In some countries that is happening now. Patent and Intellectual property rights are ignored in many parts of the world. Countries in the third world counterfeit drugs and one of the big problems is they are getting into the world wide drug supply. China and other scofflaws will never be markets until they are brought into the international system of trade. The one place pharmaceutical companies have leverage is in the first world. Those countries are members of the World Trade Organization. If they ignore patents, they face trade restrictions and punitive tariffs. This gives the drug companies some room to maneuver.

The Big Dog in the fight is the United States. If Washington gets into the drug pricing business you can kiss advancements in pharmaceuticals away. Either the Feds will set up a system that allows drug prices to soar because Washington is paying for them or a system that sets prices so low there will be incentives for development of new drugs. Either way the public is the loser.
 
Written By: James E. Fish
URL: http://faroutfishfiles.blogspot.com/
Oh crap, I guess the post preceeding this one is my fault for fully spelling out the dreaded "V-word."

Sorry about that!
 
Written By: Terry
URL: http://
Think you missed the next line:

Govt: "Nice patent you had."
What a marvelous idea! The government can suspend any intellectual property rights simply because it thinks some company’s product is too expensive.

If that happens, you’ll see R&D among the drug makers drop dramatically: why spend the money to develop a new drug when the government will allow other companies to copy it?
 
Written By: steverino
URL: http://steverino.journalspace.com/
Jpm100 and Mr. Fish are correct as to what will happen to R&D and price. Americans subsidize the Canadian drug market and every other major market that has cost controls. So we can, in the future, see private insurance subsidize the government sponsored programs. That won’t last long until be have the age based/contributing citizens worth based treatment by the government programs as is utilized in Europe. Have a bypass in your seventies as my father did; no way in most of Europe. And then we’ll also be subject to the economically and inefficient government enforced triage as in Canada and other western countries with socialized medicine. And of course the medical costs will eat into all other programs. Note that Britain is planning to cut its navy in half and also cut its combat forces. Their social programs need the money. Now the US will have to shoulder an increase defense burden

Our present system certainly has it faults, but I have experience the military’s non war casualty medical services and I was cured of any thoughts about socialized medicine 30 years ago. For a start, which we won’t do of course, is disallow most suits extreme monetary awards, place non-medical people on medical review boards to get rid of dangerous doctors, place minimum charges on medical services to discourage unnecessary use, and encourage with laws small business cooperatives to form medical pools for employees. Also make each person who can not afford major medical costs to pay an amount relative to their earning power. When it is free for whatever reason, it is abused; it’s just human nature for most people.
 
Written By: AMR
URL: http://

 
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