Medicare Part D in the Fiscal Cliff negotiations

Want to cut wasteful federal spending? Negotiate drug prices under Medicare Part D.

Republicans are floating three ideas to make cuts to the Affordable Care Act as part of a fiscal deal. Since they’re Republicans, all of the ideas they’re floating are horrible: less money for community health and prevention (because sicker is better), cutting the subsidies (because the middle class needs another financial hit right now) and slicing into the Center for Medicare and Medicaid Innovation (because it’s essential to maintain all of the existing inefficiencies in health-care delivery).

So here’s an alternative. I’m not enough of a health-policy wonk to know exactly how many tens of billions of dollars a year it would save, but the answer is “a bunch.” Allow the government to negotiate with pharmaceutical companies for discounts under Medicare Part D, just as every other large buyer of pharmaceuticals – health insurers and health-care systems – does. The only reason that doesn’t happen now is that Bush the Lesser and some of his Congressional buddies were in the pocket of Big Pharma, and wrote a specific ban on the practice into the law.

What was done by law can be changed by law. The administration of such a program would be complex, but the legislation would be simple, and the savings immediate.

Footnote I agree with commenters a previous post that the fiscal cliff is entirely an artificial, political problem. But that doesn’t make it an imaginary problem.

And there is a genuine underlying fiscal issue. In the short term, we need fiscal stimulus to get the economy back on track. But in the longer term we can’t keep spending more than 20% of GDP in federal programs and taking less than 20% of GDP in federal taxes. There are lots of good places to get revenue (carbon taxes, other pollution taxes, spectrum fees, financial-transactions taxes), and several places to make beneficial cuts, not because we’re “borrowing from China” but because we’re wasting money and in some cases doing active damage: e.g., defense, agriculture, ethanol, water projects. There are also obvious places where we could usefully spend more money (e.g., research, early childhood education, lead removal, paying federal civil servants enough to compete for top talent, replacing regressive state and local taxation). Not urgent, but important.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

21 thoughts on “Medicare Part D in the Fiscal Cliff negotiations”

  1. What we should really notice is that having taken huge lumps in the recent election Republicans don’t stop for a minute in promoting their agenda. They don’t take Black Friday off. they don’t stop. Democrats on the other hand quit easily, and allow Republicans to promote their agenda, and the Democrats fall for it, immediately focusing on the Republicans agenda Instead of on getting done what needs to be done to promote the Democrats agenda.

    Take for example judicial appointments. Has a single person in the administration bothered to notice that there are scores of lifetime federal bench seats where Obama hasn’t even bothered to nominate anyone? Meanwhile, the villagers are screaming in terror about a psuedo crisis that they created and that gives obama all the leverage needed to fill every one of those seats and break the GOP of its hostage taking habit on appointments once and for all.

    What have the Democrats done to fill the seats? Nothing. It just goes to show one reason why the Republicans are so effective and so successful with such a horrible agenda is that they don’t stop promoting it and they don’t rest until they’re beaten with sticks, and then they immediately set about trying to get to their goal some other way. Democrats on the other hand immediately chase the next distraction and forget all about what was supposedly their top priority a while ago.

  2. Austin Frakt et al estimate that have a VA like Medicare Part D would save at least $150 billion dollars over a 10 year scoring horizon:

    Other options to save some serious money on healthcare where the money is coming out of rentier income instead benefits:

    1) Argue for a public option (~150 to ~200 billion over 10 years)
    2) Allow Medicare to buy DME through preferred regional suppliers (~40 billion over 10 years)
    3) Allow Medicare to act like a massive purchaser of goods and use its market power for that purpose

    1. Dave Anderson

      Did you read the Frakt research or even the words in the link you provided above?

      1. Frakt explains that the VA formulary is much more limited than the Medicare Part D formulary. Vets I know have to take a Part D plan anyways because the VA won’t cover needed drugs like Crestor.
      2. Frakt estimates (questionably) that the government could save $15 billion a year (out of the $50 billion spent on Part D, primarily on expensive drugs for the very ill and totally free drugs for low income seniors) by not buying the expensive drugs many seniors need (death panel anyone?) but also estimates that seniors would spend $12 billion out of their own pockets to get those drugs they need. OK, screw us seniors even more than Obamacare already has but at least explain that’s what you are doing with your Democratic proposal.

      Also the Frakt research is three or four years old and does not take into account that Part D prices have not risen anywhere near what was predicted and in fact that the program has come in 50% under the original estimate in costs to both us seniors and the government.

      But keep drinking the Democrat kool aid.

  3. One Congressional report in 2008 found that “If Medicare Part D paid the same price as Medicaid for all drug purchases, the total savings to the taxpayer over the next ten years could be as much as $156 billion. Beneficiaries could also save up to $27 billion.”

    The National Committee to Preserve Social Security and Medicare estimated that “Allowing the Secretary to negotiate drug prices has the potential to save billions of dollars –potentially up to $24 billion annually – assuming that the mean reduction in drug prices obtained through the limited use of VA’s negotiation techniques could be applied to the Part D program’s overall prescription drug cost of $49 billion.”

    A group of economists working under the auspices of the VA found that:

    The VA pays 40% less than Medicare plans for prescription drugs.

    Medicare plans cover about 85% of the most popular 200 drugs on average (ranging from a low of 68% to a high of 93%).

    The VA’s national formulary includes 59% of the most popular 200 drugs.

    If Medicare obtained the same drug prices as the VA, it would save $510 per beneficiary per year or a total of
    $14 billion per year (2009 prices).

    If Medicare plans tightened formularies to the level of generosity available from the VA (59% of top 200 drugs covered),beneficiaries would lose $405 of value per year associated with the loss of choice of drugs. (The right way to interpret this is that the average beneficiary would be precisely indifferent between the loss of drug choice and $405 dollars in cash.)

    Because the savings ($510 per beneficiary) exceeds the loss of value to beneficiaries ($405), they could, in principle, be made whole with $105 left over (= $510 – $405).


  4. Charlie Pierce is, as usual, invaluable on this topic .

    The striking thing about these proposals is that they are entirely about small changes that could be made in order to save quite small amounts of money and to make cuts that don’t affect any of the parts of the ACA that Republicans protest about. It’s just a way to make Boehner look better among his fractious base by giving him trophies from the ACA, without affecting the parts his base actually complains about, without saving much money (if any; some of those programs for community health and for studies to test Medicaid and Medicare reforms might save money overall), and with bad policy outcomes. The only significant upside is that it makes Obama look like a wimp and Boehner look like a tough guy – and I don’t see why that’s an upside for any Democrat.

  5. This is concern trolling of the Republicans, right? Obviously this is what the Republicans would do IF they were interested in improving health care and saving money rather than sticking it to Democrats and poor people for the benefit of the 0.1%. And if that really is Red Riding Hood’s grandmother, she won’t try to eat her.

  6. “If Medicare Part D paid the same price as Medicaid for all drug purchases, the total savings to the taxpayer over the next ten years could be as much as $156 billion….”

    The difficulty is that that $156B would be a direct transfer payment from the taxpayers to the pharmaceutical and insurance industries. It will therefore be defended by every Republican in Congress — thereby, on a side note, demonstrating that they are not “conservatives”.

    The transfer payment makes up a noticeable portion of those industries’ total earnings and has already been calculated into their earnings forecasts and priced into their stock. Therefore, the clawback of the transfer payment, ethically imperative though it may be, would have concrete economic consequences. Discuss.

    1. Am I missing something here? Should not the ‘would be’ in the second paragraph be ‘is currently’ a direct payment from the taxpayers to the pharma etc industries? In fact the transfer is much higher than that, but if Medicare could negotiate from its position of large buyer, then it could get a reduction in price of this amount. The rest of the second para is clear enough, with that amendment.

      The ‘problem’ posed in the third paragraph is a good one, and investors in the pharma/insurance companies would be bound to notice/squawk/lobby/etc.

    2. Discuss?

      OK. The effect is to transfer money from shareholders in pharmaceutical companies to taxpayers and prescription drug users. To the extent these are the same people the total effect is a wash. To the extent they are not the same, the transfer is likely from well-off, successful rent-seekers, to the general public.

      1. …which overall would have a stimulative effect.

        Talking through my hat, I suspect it would kind of suck for Ireland, where I believe that many of the top pharmaceutical companies are based, but that is not our problem. And the effects would surely be dwarfed by the Eurozone’s insanity anyway.

  7. I am on Part D and another, somewhat related, feature needs to be scrapped. When a pharmacy seeking to steal customers from its competition issues any type of coupon (transfer your Rx and get a $10 gift card is the one I see most often), Medicare prescriptions are excluded. Ditto for deductible waivers from the drug companies themselves. I have had rheumatoid arthritis for 33 years and the newest medicines always cost a bloody fortune. Co-pays can be up to $900 a month, so there is no switching to a different drug to see if it works better.

    1. Unfortunately, the recent arthritis drugs that I’m aware of (as a biologist but not a medical person, not an immunologist, and not someone who pays particular attention to this area) are humanized monoclonal antibodies – proteins that have to produced in cell lines of one sort or another and then purified to remove all sorts of possible other products and contaminants, at a simply enormous expense. I’m sure there’s extraction of profits going on, but the production expenses of these sorts of drugs are really, really high in a way that as nothing o do with profits or with paying for research.

  8. The brilliant lefty behind this blog writes:

    “So here’s an alternative (change Medicare Part D rules to mandate that price negotiations take place between the government and big pharma rather than between insurers and big pharma). I’m not enough of a health-policy wonk to know exactly how many tens of billions of dollars a year it would save, but the answer is “a bunch.””

    Apparently this lefty is also not serious enough about his motto (own opinion vs. own facts) to simply look up the facts concerning how much is spent on Medicare Part D. The government only spends a few “tens of billions of dollars a year” on Part D so unless the government passes a law that says big pharma should give away all drugs for free to senior citizens, your great idea won’t save anything.

    1. Dennis: You clearly know a lot about Medicare. You just as clearly do not know much about RBC, so I am going to you the first timer break and not delete your comments despite the nasty words (But keep drinking the Democrat kool aid, the brilliant lefty stuff above). If you have substantive things to add here, by all means do so. But from here on, even a comment with some substance which also includes gratuitous insult will be deleted.

    2. Stuart Levine´s comment above gives the annual Medicare part D budget ($49bn) and the expected savings if you applied VA practice ($24bn), of which $14bn from lower prices for the same drugs, and the rest from a narrower formulary, which I understand means without pseudo-new drugs with no proven additional benefit, and branded versions of off-patent generics.

      Hint: read the thread as weil as the post before hitting the ¨submit comment¨ button.

      You may be surprised to learn that half of the largest drug companies are based in Europe, where their products are sold in regulated environments much more like the VA than Medicare. It´s true that they all make a lot of their profits in the under-regulated US market – but the difference is exaggerated, as the marketing costs in the USA are also much higher.

      1. and many of those drugs are also sold in Canada in a semi-regulated market, at lower prices. That’s why there was (and may be still be, despite efforts of the FDA) a booming business in websites selling drugs into the US from the Canadian market. The Canadian authorities weren’t wild about that either (there are rules about seeing the person you’re prescribing drugs for), in part because of trade pressures from the US government. But James W’s point is valid: the companies make comfortable profits in markets where the proposed policies are in place. They may prefer the US market with its huge profits, but it’s not driving them out of business to spare the taxpayers a few billions.

  9. How much of American strength is based upon the liberal brain? We all know there aren’t many top Republican brains in the arts. How about the sciences?

    And, man, do we need some more FMRI research on what makes the Republican brain.

  10. Getting a bill passed through Congress that lets the government negotiate pharmaceutical prices with the drug companies will run into a buzzsaw of opposition. When Medicare was passed in 1965 the reason medications were not included was that the pharmaceutical companies promised to kill the whole program if the federal government was able to include a prescription drug program. The result was that the Chairman of the House Way & Means Committee dropped the prescription drug plan and replaced it with Medicaid for the poor.

    Then the drug companies remained implacable foes of a federal drug plan until the Bush II administration, at which time companies were dropping drug coverage because it was too expensive. So after a false start by an attempted executive order killed by the courts, the Part D was passed in 2003. But it was totally operated by private companies with only the loosest oversight by the CMS. The private companies in each region (minimum of two required)must negotiate individually with the pharmaceutical companies and share the cost savings with covered patient.

    The drug companies remain in control of the drug prices with no interference from the federal government.

    The political likelihood of passing a law that allows the federal government to negotiate with pharmaceutical companies for drugs is slim to none. They’ve been in control of the politics of this issue for nearly 50 years and nothing is on the horizon to change that.

  11. “But in the longer term we can’t keep spending more than 20% of GDP in federal programs and taking less than 20% of GDP in federal taxes. ”

    The history of the last 80 years says otherwise. Nothing notably bad happens if you run a deficit of a few % of GDP forever and ever. There are valid reasons to cut deficits and even run surpluses when times are good (for instance so that it is politically easier to respond to recessions, natural disasters, wars, etc. with deficit increases). But if we spend 21% and tax 19% for the next century, there isn’t any kind of catastrophe that would happen as a result that requires us exploding the austerity bomb this December.

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