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Medicare Hot Air

Can the Democrats' bill bring lower drug prices? Don't count on it.

January 17, 2007

Modified: January 17, 2007

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Summary

Democrats are overselling their Medicare prescription drug bill. They claim it will bring about big price cuts for medication while Medicare experts say it won't. Republicans have been equally misleading, describing the bill as a system of severe price controls, which it isn't.

The fact is that the bill would do little more than require the Secretary of Health and Human Services to talk to drug companies about granting discounts. It specifically denies him the bargaining leverage of paying only for some drugs and not others.

Analysis

Ever since Congress passed President Bush's new prescription drug benefit for Medicare recipients, Democrats have been attacking it as a giveaway to drug companies. In the 2006 House and Senate campaigns, several TV ads attacked GOP lawmakers for supporting a law that forbids the federal government from negotiating directly with drug companies for lower prices. Democrats promised they would repeal that ban.

Now Democrats are advancing such a bill,  H.R. 4 , which passed the House last week by a  vote  of 255 to 170. Prospects in the Senate are unclear. Both sides are making vastly exaggerated claims about its likely effect, which independent experts describe as negligible.

During debate, its chief sponsor John Dingell of Michigan flatly predicted big savings: 

Dingell:  This legislation is simple and common sense. It will deliver lower premiums to the seniors, lower prices at the pharmacy and savings for all taxpayers . . . . I have confidence that Secretary [Mike] Leavitt can cut a good deal with the bargaining power of 43 million beneficiaries of Medicare behind him without restricting access to needed medicine.

And Republicans described the bill as giving the government power to set drug prices. Rep. Michael Burgess of Texas took the lead for Republicans:

Burgess: Under the guise of negotiation the Democrats propose to enact draconian price controls on pharmaceutical products.

Both sides are blowing hot air. A number of experts, including the Congressional Budget Office and the chief actuary of the Medicare system, say the bill won't bring the lower prices Democrats promise. And contrary to the Republican claim, the actual language of the bill grants no price-setting authority to federal officials.

What the Bill Says

As Democrats promised, their bill states that "the Secretary [of Health and Human Services] shall negotiate with pharmaceutical manufacturers the prices (including discounts, rebates, and other price concessions) that may be charged" for drugs that Medicare will pay for. That would go even farther than removing the prohibition on negotiation contained in current law. By using the word "shall" it actually requires the secretary to act.

However, in the next section the bill also says, "Nothing in paragraph (1) shall be construed to authorize the Secretary to establish or require a particular formulary." Translated, that means the secretary would have no authority to set up a preferred list of drugs for which Medicare  will pay. Without such a list, or the threat of keeping some drugs off the formulary, drug companies would have no particular incentive to cut their prices.

What Experts Say

For that reason, the bipartisan Congressional Budget Office concluded that H.R. 4 would have a "negligible" effect. In a letter to Dingell on Jan. 10, CBO's acting director Donald B. Marron said:

Marron: 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 [private 'prescription drug plans'] under current law.  Since the legislation specifically directs the Secretary to negotiate only about the prices that could be charged to PDPs, and explicitly indicates that the Secretary would not have authority to negotiate about some other factors that may influence the prescription drug market, we assume that the negotiations would be limited solely to a discussion about the prices to be charged to PDPs.  In that context, the Secretary’s ability to influence the outcome of those negotiations would be limited.  For example, without the authority to establish a formulary, we believe that the Secretary would not be able to encourage the use of particular drugs by Part D beneficiaries, and as a result would lack the leverage to obtain significant discounts in his negotiations with drug manufacturers.

Medicare actuaries reached a similar conclusion. Paul Spitalnic, director of the actuarial group responsible for the drug program, known as Part D of Medicare, was quoted in an HHS news release  as saying:

Spitalnic: Manufacturers would have little to gain by offering rebates that aren't linked to a preferred position of their products, and we assume that they will be unwilling to do so. . . . We would not expect H.R. 4 to have any effect on . . . the prices that are ultimately paid by Part D.

Other Opinions

Some observers still see merit in the Democratic measure. The New York Times urged passage in a Jan. 12 editorial, predicting that the result "could be lower costs for consumers and savings for the taxpayers." But saying it "could" bring lower prices is not the same as saying it "would." The Times noted the lack of bargaining leverage in the bill, but put its faith in persuasion:

New York Times: The secretary does have the bully pulpit, which he can use to try to bring down the cost of overpriced drugs.

Others didn't share the Times' optimism in preaching to drug companies from a "bully pulpit," however. The Washington Post said in a Jan. 13 editorial (after the bill had passed) that the Democratic bill is "misguided" and that predictions of price cuts are "too optimistic." The Post said the low drug prices that the Department of Veterans Affairs gets for drugs – prices Democrats often point out while arguing for their bill – result from a restricted formulary: The VA covers 3,000 fewer medications than Medicare does. And the Post  asked:

Washington Post: If drugmakers know that Medicare must buy their pills, why would they grant a discount?

We can't predict the future, so we don't know whether preaching from the "bully pulpit" would actually wring price cuts from drug companies, but the fact is that's about all the bill allows. We may never find out for sure. Prospects for Senate passage are uncertain, and President Bush has promised to veto the measure should it pass. Furthermore, the margin in the House was well short of the two-thirds majority that would be required to override a veto.

Sources

Congressional Budget Office, " H.R. 4, Medicare Prescription Drug Price Negotiation Act of 2007, January 10, 2007,  Cost estimate for the bill as introduced on January 5, 2007" 10 Jan 2007.

Center for Medicare & Medicaid Services, "CMS Actuaties Conclude That H.R.4 Would Have No Effect on Lowering Drug Prices,"  news release , 11 Jan 2007.

"Negotiating Lower Drug Prices," editorial, The New York Times, 11 Jan 2007 (subscription required)

"The Wrong Prescription: Government should not negotiate drug prices in Medicare,"  editorial, The Washington Post, 13 Jan 2007: A18.