I stole that headline directly from the Washington Post. I was too lazy to come up with one that good on my own. Here is the gist of the story.
HOUSE Democrats delivered on a campaign promise yesterday, passing a bill that would require the government to negotiate the price of pharmaceuticals covered by the new Medicare drug benefit. The idea is that government negotiators could force prices down, generating savings that could be used to make the benefit more generous. But the measure is misguided.
The Democrats point to the Department of Veterans Affairs, which manages to negotiate discounts for the drugs covered in the veterans' health program. But the department can do this because it is free to deny coverage for drugs whose makers refuse to provide discounts: Fully 3,000 of the 4,300 medicines covered by Medicare are unavailable under the veterans' program. Restricting the list of covered drugs saves money, but it also reduces the quality of the benefit -- 1.5 million veterans are sufficiently unhappy with the result that they opt to buy the more inclusive Medicare coverage.
I continue to think that the Washington Post is one of the best newspapers in the nation. It is liberal and Democratic to its marrow, to be sure; but it displays a lot of independent and clear-headed thinking. The economics of this issue are not difficult. Medicare is such a large player that it won't be negotiating prices, it will be setting prices. Price controls always limit the supply and quality of whatever is being regulated. Pat Cleary at the National Association of Manufacturers has this:
At core, this debate is about whether lawmakers put their trust in the market or the government. This year alone, premiums for the drug benefit under Medicare Part B are 40% lower than originally expected as drug makers compete for their share of the market.
But in fact the Democrats themselves realize that this is a bad idea. Again from the WaPo:
Recognizing that narrow formularies are unpopular, the Democratic plan does not permit Medicare to establish one. But if drugmakers know that Medicare must buy their pills, why would they grant a discount? The Congressional Budget Office estimated this week that savings from direct negotiation would be "negligible."
If I get this right, it means that the Democrats aren't really doing anything at all. Maybe we were right to put them in charge of Congress!
The United States has the most productive pharmacy in the world, due to the competitive market we have maintained. The WaPo realizes that there is no alternative to this market for producing the best drugs fastest at the best prices.
Not only are the Democrats too optimistic about government negotiation; they are also too pessimistic about the current system in which private insurers administering Medicare drug benefits do the price bargaining. These private insurers stand to profit if they can secure discounts and cut premiums and thus attract more customers: Witness the fact that the average monthly premium has fallen since the program began a year ago. Private insurers can do this precisely because they are free to establish formularies, but market discipline ensures that these lists are not unappealingly narrow. The insurers need to keep customers.
The Democrats' stance is troubling because it suggests an excessively government-led view of health-care reform. One of the key challenges in health policy is to understand which drugs, tests and therapies are most cost-effective; although it will take government pressure on doctors and hospitals to disclose the information necessary to figure out what works, solutions are most likely to be found by competing private entities. In drugs, for example, there needs to be a culture of paying handsomely for new ones that really do add value -- and refusing to pay for pseudo-new drugs that merely mimic cheap generics. Striking the right balance is not easy, and it won't be accomplished by government fiat. The better approach is to let each insurer offer its own version of the right balance, see whether it attracts customers -- and then adapt flexibly.
Responsible Disclaimer: I should note that after my father personally defeated the Japanese Navy, he spent the rest of his productive life working for Merck Inc. Growing up in a house filled with note pads, pens, and plastic models of human bones and organs (which came in handy at Halloween), all of them sporting the name of some new drug (my brother and I had a generic name for this: mexatoxaloxafloxin), I was inoculated early on against any prejudice towards big drug companies.
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