It’s Now Time: Medicare Must Negotiate Drug Prices

Free-markets are a necessity in our country, just look at the myriad of consumer products that we consider before we make our informed purchases. To work properly, free-markets must be allowed to function efficiently and transparently. Unfortunately, the pharmaceutical industry is not operating in a true, free-market system.

When drug prices are arbitrarily increased at the whim of pharmaceutical manufacturers without any justification, we have a problem – a big problem. On top of this, we have middle-men – pharmacy benefit managers – who do a great job of making the price component of drugs more opaque than desired. By design, opaqueness veils inappropriate shenanigans that undermines an efficient free-market process. This is the status-quo in the drug industry.

A 2021 RAND Corp. study found that drug prices, on average, are 2.56 times higher in the U.S. compared to the same drugs paid by 32 other nations in the Organisation for Economic Co-Operation and Development. 

This past January, drugmakers have raised prices on over 800 drugs by an average of 4.5 percent, according to GoodRx counting. Since July 1, drug companies have driven up prices by an average of 3.5 percent on at least another 65 drugs. According to testimony by America’s Health Insurance Plans (AHIP), more than a quarter of Americans said they could not afford purchasing medicine in the past year. Additionally, research findings suggest that 55 percent of Americans grew more worried during the pandemic about drug affordability.

Americans consume a lot of prescription medicine. According to the Kaiser Family Foundation Tracking Poll in May of 2021, over half (53 percent) of American adults reported taking at least one prescription drug, while one in four say they currently take at least four prescriptions. 

No Massive Buyer to Leverage Down Drug Costs

Despite the high consumption of prescription drugs, there is no single domineering purchaser that can hammer down prices for the masses. A typical efficient free-market approach would allow for reasonable drug pricing, but for many various reasons, we don’t have this luxury in the pharmaceutical industry. In pricing drugs, the pharmaceutical companies are allowed to play chess while all buyers, playing checkers, are divided into smaller players without having impactful purchasing power. Buyers, therefore, cannot succeed at winning large price concessions. 

One big reason begins at the lobbyist level, where Big Pharma exercises their financial muscles to influence policymakers at both the state and federal levels. Regardless of political ideology, many elected officials publicly scorn high drug prices, but amazingly, they are curiously reluctant to collectively do anything of great consequence to control this ongoing problem. Election cycles enable cash-heavy drug lobbyists to finance (and influence) cash-hungry candidates to win elections.

Medicare is Not Currently Allowed to Negotiate Drug Prices

In 2019, Medicare had approximately 61 million beneficiaries, accounting for 21 percent of the total U.S. national healthcare expenditures, making it a logical force to negotiate drug prices. For years, discussions centered on Medicare negotiating prescription drug prices directly with pharmaceutical manufacturers. 

The Medicare Modernization Act of 2003 (P.L. 108-173) created the Medicare Part D prescription drug program that is administered through private insurance plans. Under this Act, Medicare is prohibited from negotiating drug prices with manufacturers, however, the contracted private insurers that market Part D are allowed to conduct such negotiations. On the surface, this may appear to be beneficial, but allowing multiple private insurers to separately negotiate drug prices merely spreads the bargaining power of the Medicare programs across numerous plans. Consequently, the federal government pays more for Medicare drugs than it does for drugs purchased through other federal programs, namely the Department of Veterans Affairs (VA) and Department of Defense health systems.

In 2007, while interviewed for ‘60 Minutes’ to discuss prohibiting Medicare from negotiating directly with drug companies, then U.S. House Representative Walter Jones (R-N.C.) flatly stated: “The pharmaceutical lobbyists wrote the bill.” The lobbyists WROTE the bill?

The bottom line is that drug companies are allowed to advertise their drugs directly to consumers (DTC), yet Medicare is not allowed to directly negotiate with the drug companies. The U.S. Government Accountability Office (GAO) released a report in May that finds Medicare likely spends more money because of DTC advertisements. 

Allowing Medicare to Negotiate Drug Prices

A Democrat-sponsored bill in the U.S. House of Representatives, HR 3, empowers the Secretary of the Department of Health and Human Services to directly negotiate prices for certain drugs with manufacturers. In 2019, the Congressional Budget Office estimated that HR 3 would save around $450 billion over 10 years.  

Among other regulations, HR 3 states the following:

“The negotiated maximum price may not exceed (1) 120% of the average price in Australia, Canada, France, Germany, Japan, and the United Kingdom; or (2) if such information is not available, 85% of the U.S. average manufacturer price. Drug manufacturers that fail to comply with the bill’s negotiation requirements are subject to civil and tax penalties.”

HR 3 and the drug cost legislation would also give employer plans and privately insureds access to government-negotiated prices, in addition to those on Medicare. The June 2021 Kaiser Family Foundation polling shows that this approach to negotiate down drug prices has bipartisan support from more than 80 percent of the public. 

In addition to this bill, the Biden Administration issued an executive order on July 9 that would fight high drug costs by importing prescription drugs from other countries and curbing the high cost of medications. This order, however, does not include any mention of allowing Medicare to directly negotiate with drug companies. Most likely, this will require legislation coming from HR 3 or something similar.

Pushback by Pharmaceutical Companies

The ongoing argument made by pharmaceutical companies is that government negotiating powers would stifle innovation of new drugs, eroding access to new treatments. But here’s something to consider. A House Oversight and Reform Committee report was released in early July that reveals PHRMA is not being transparent with the public. It found that, from 2016 to 2020, 14 leading drug companies spent $577 billion on stock buybacks and dividends, which was $56 billion more than they spent on research and development (R&D) during that same time period. In short, despite their claims, pharmaceutical companies are not spending significant portions of their profits to develop new drugs and treatments. Instead, this money is being used to game the system by finding approaches to suppress competition and concocting ways to make more money. 

PHRMAs opposition to Medicare-negotiated drug prices really means they believe that government involvement would indeed drive down prices. 

Bottom Line

If we can’t have a true, free-market approach in the drug industry, then it is high time to pass bi-partisan legislation allowing Medicare to negotiate fair prices with drug companies. There are numerous other ideas that can be tagged to this approach, but this is a great first-step to having a sustainable, long-term solution to rising drug costs. It’s now time for a government checkmate on a long and contentious drug pricing problem.

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