One hundred hours. That’s not a lot of time — just two and a half weeks of work for the average American. But apparently, if House Speaker Nancy Pelosi and the Democrats keep all their promises, it’s plenty of time to ruin our health care.
Today, as part of Pelosi’s agenda for the first 100 hours of the new Congress, Democratic lawmakers promise to pass legislation allowing Medicare to negotiate prices directly with pharmaceutical manufacturers. Their idea is to use the government’s large market share — some 42 million beneficiaries — as a big chip to negotiate dramatically lower prices.
There’s one problem with their plan, though. That bargaining chip isn’t nearly as big as they think it is.
If Pelosi and the Democrats had pledged to spend just a few more of their first 100 hours learning a few basic facts about economics, they would realize the folly of thinking that government can do business better than private businesses themselves.
Indeed, once Pelosi gets to the negotiating table, she’ll find out that the government’s bargaining chip isn’t as big as she hoped.
In any negotiation, the side that can walk away from the table with the least amount of pain has the upper hand.
Pharmaceutical manufacturers, who often have a patent giving them the sole right to market a drug, will have the upper hand because there are no competitors the government can go to. More often than not, they’re the only game in town.
The government’s negotiator, on the other hand, will have a relatively weak position. If he walks away from the table, he’ll face a political firestorm from seniors wondering why Medicare can’t get them the medicines they need.
This is exactly what has happened since the U.S. Department of Veterans Affairs started excluding newer drugs from its National Formulary in order to control costs. As Columbia University researcher Frank Lichtenberg has reported, “Only 38 percent of the drugs approved in the 1990s, and 19 percent of the drugs approved by the FDA since 2000, are on the VA National Formulary.”
This is why “a third of VA seniors prefer to switch to Part D, but cannot because they would lose other VA benefits,” according to Manhattan Institute scholar Benjamin Zycher. If Pelosi has her way on Medicare Part D negotiations, those veterans might not have any hope for a refuge after all.
Perhaps recognizing this problem, the House Democrats’ proposed legislation, the Medicare Prescription Drug Price Negotiation Act of 2007, states that nothing in the bill “shall be construed to authorize the secretary to establish or require a particular formulary.”
This means the government’s negotiator would not be able to ban any medicines because of a manufacturer’s refusal to come down on the price. In effect, he would be forbidden from “walking away” from the negotiating table — the biggest source of bargaining power.
But if the government’s negotiating position is so weak, how is it that private drug plans can do any better at negotiating lower prices with drug companies?
Paradoxically, it’s because private coverage plans are smaller, and there are more of them. This means that the drug companies can “price discriminate,” or charge higher prices to one plan and lower prices to another, leaving it up to the consumer to choose the plan that gives them the drugs they need at the best price.
This is the genius of competitive markets: They allow individuals to decide what’s best for them, rather than be forced into a one-size-fits-all government plan.
This isn’t obscure economic theory, either. It’s been confirmed by real world results elsewhere in the government, in Medicaid’s drug plan.
According to a 1990 law, pharmaceutical companies must offer their wares to Medicaid at the lowest price charged to any private plan. Predictably, after that law was passed, drug companies cut back on the discounts they offered to private plans.
In a recent report, the National Center for Policy Analysis concluded that “given the resulting price increases for non-Medicaid buyers — including other government drug purchasers, such as the Veterans’ Administration — the savings to society are not at all clear.”
On the whole, it’s good for politicians to keep their promises, but it would be much better for our health if the Democrats broke this one promise. Don’t worry Madam Speaker, we won’t hold it against you.
Peter J. Pitts is director of the Center for Medicine in the Public Interest and a former Associate Commissioner of the FDA.
