When is a negotiation not really a negotiation? For starters, when one side has behind it the entire power and force of government. That would be the reality if attempts by the White House and progressive Democrats to include in the massive $3.5 trillion spending bill new powers for Medicare to compel prescription drug manufacturers to “negotiate,” under threat of severe financial punishment, come to fruition.
Negotiating with Medicare is a bit like negotiating with a mobster seeking protection money. Behind the thin pretense of choice lies a heavy threat of force.
Concern over introducing yet more distortions in the healthcare market led policymakers to limit Medicare’s ability to directly negotiate prices at the time that Medicare’s Part D prescription drug benefit was created. But it’s not as if they left the government at the mercy of sellers. The private plans contracted with by Medicare are free to negotiate drug prices, and they aggressively do so.
The fact that prices are already being negotiated between plan providers and drug suppliers is why the Congressional Budget Office (CBO) said in 2019, reaffirming many previous statements, that “broad negotiating authority by itself would likely have a negligible effect on federal spending.” Recognizing this, the proposals go further and provide for the government a big stick: an excise tax of 95 percent on manufacturers that don’t eventually agree to a government price.
That’s not a negotiation, that’s a shake down.
It’s one thing to want to get the government involved in providing financial assistance to Medicare patients seeking medication, and another thing entirely to have the government effectively setting drug prices by indiscriminately throwing its weight around.
The consequences of the latter could be severe. Driving prices down through what are effectively price controls would reduce incentives to innovate and drive some manufacturers out of business, thereby limiting supply. A recent CBO report estimated there would be 59 fewer new drugs introduced, many with lifesaving potential, over the next three decades, as a consequence of Medicare “negotiations” and sanctions.
Access to drugs would also be curtailed by another new power Medicare would gain through removal of Part D’s “non-interference clause”: the ability to set a national formulary and thereby centrally limit access to certain prescription drugs for Medicare patients.
Are prescription drug prices excessive? Almost certainly so. But it’s a problem largely created by government intervention—through overreliance on third-party payers, and excessive and expensive regulations—the best solution to which is not more government intervention or allowing bureaucrats to come between doctors and patients.
The Democratic proposals aren’t all without merit. One idea that would be beneficial involves increasing transparency on pharmacy benefit managers and the rebates they receive from manufacturers in exchange for negotiating the placement of drugs on insurer and pharmacy formularies. The goal is to ensure more savings are ultimately passed on to consumers and not simply pocketed by middlemen.
Other ideal reforms would more directly tackle the sources of high drug prices by streamlining the FDA and its costly drug approval process. As an example, the pandemic has exposed just how broken is the FDA through its meandering effort to approve rapid testing already widely available across Europe. Regulatory reciprocity that allowed Americans access to drugs and devices approved by other developed nations would go a long way toward enhancing competition and lowering costs. In contrast to current Democratic proposals, it would do so by improving rather than growing government and potentially creating many new problems in the process.
