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Drug Price Negotiations: When the Savings Ain’t So

by Pete Sepp / /

Much is made these days of “fact-checkers” who follow up on the context and accuracy of public figures’ statements. In the interests of raising the often-poor quality of such efforts, our research affiliate, NTU Foundation, has long labored to provide analysis that can unravel complex debates for taxpayers.

Nowhere is that word “complex” more applicable than the issue of how governments purchase prescription drugs, and how delicate the balance can be between the upfront costs of medications versus the long-term value they deliver for taxpayers. We have examined many aspects of the issue, from importation, to Part D rebates, to other regulatory changes.

For those reasons a recent segment on the “Morning Joe” program caught our eye – and our ears – which discussed prescription drug prices and ended with a plea for viewers to contact their lawmakers in support of giving the Department of Health and Human Services (HHS) more power to directly negotiate prescription drug prices with pharmaceutical companies.  The rallying cry: “bring the free market to medicine.”

There are of course many questions on this issue free-market advocates should be asking: do programs like Medicare and Medicaid, which already cost taxpayers hundreds of billions of dollars a year, interfere with the relationship between doctors and patients? Why aren’t citizens allowed to purchase health insurance across state lines? And, why is health insurance still so tightly linked to employers rather than consumers?

It would be tempting to lump in with those fundamental concerns the question of “Why shouldn’t the government be able to negotiate prescription drug prices?” But here’s why the answer is more complicated.

HHS itself faces challenges in implementing a negotiation process that the Congressional Budget Office (CBO) had already explored in-depth. Although CBO’s work is not always unimpeachable, it’s conclusions about this proposal have been consistent. In its ongoing studies of the impact that federal candidates’ budget proposals would have on taxpayers, NTU Foundation has frequently encountered the negotiation issue; it is a staple of many left-of-center candidates, not free market advocates. Here is the text from one of NTU Foundation’s reports:

Allow for Drug Price Negotiation

Cost: Unknown.

Note: Related legislation has been introduced in the form of H.R. 1102 (113th Congress), the Medicare Prescription Drug Price Negotiation Act of 2013. The bill would permit federal health program officials to negotiate with pharmaceutical manufacturers. Representative Braley is currently not a cosponsor of this legislation; however, he was a cosponsor of the version of the bill (H.R. 4752) that was introduced in the 111th Congress. A cost estimate is not currently available.

A March 3, 2004 CBO letter to Senator Ron Wyden (D-OR) notes: “CBO has not estimated the effect on federal spending of authorizing the Secretary to negotiate prices for single-source drugs. The extent of any savings would depend significantly on the details of legislative language; a proposal that applied to a broader range of drugs could generate no savings or even increase federal costs. The effect on federal spending would also depend on how the Secretary would choose to exercise any new authority to negotiate prices.

CBO has reiterated this position in a number of ways. In 2009, for example, then-CBO Director Elmendorf noted: “[W]e, as an organization, still believe that granting the Secretary of HHS additional authority to negotiate for lower drug prices would have little, if any, effect on prices for the same reason that my predecessors have explained, which is that...private drug plans are already negotiating drug prices...”.

What would make repealing the so-called “non-interference” provision and empowering HHS to haggle over Part D prices effective? On that point, CBO told then-Senate Finance Committee Chairman Max Baucus in 2007: “Without the authority to establish a formulary or other tools to reduce drug prices, we believe that the Secretary would not obtain significant discounts from drug manufacturers across a broad range of drugs.” Translation: a “formulary” is a restrictive, limited list of medications eligible for reimbursement by the government. Under such a scheme, seniors currently enrolled in Part D would no longer have the range of treatments available to them today. That bears a striking resemblance to the government-run rationing system (already present to a degree in Medicaid’s drug programs) that free marketers generally despise. As we observed in a 2015 communication to Congress:

[A]ttempting to tighten government’s grip on health care pricing would undermine the cause of free-market health care reform. Worse, it would bring us closer to emulating some of the single-payer type systems found in high-tax countries around the world. Indeed, single-payer legislation introduced in the U.S. Congress has been repeatedly scored by NTU’s research affiliate as precipitating annual increases in federal outlays of more than $1 trillion.

We have frequently warned of the dangers in oversimplifying the drug-pricing debate, and the recent dust-up on “Morning Joe” is no exception. Which is why our response to calls for illusory drug savings from more government interference in price-setting would be: Say it ain’t so, Joe.