Reader Correction – House Pharma Reform

A reader, who asked to remain anonymous and not have his email published, writes that in my summary of the House bill, I overstated the benefits of the bill through negotiations over Medicare drug prices with pharma.

Basically, the reader points out that price reductions will be less than hoped for because the bill will not allow Medicare to create a national formulary.  You see, pharmaceutical companies will give rebates in order to get their drugs on formulary.  Moreover, formularies allow insurance plans to move demand from one drug to another.  He points out the the economic literature argues that it’s this ability to shift demand that actually gives a plan (like Medicare) leverage while negotiating.  Therefore, since their is no formulary, Medicare’s ability to negotiate rebates is essentially toothless.

He makes a lot of sense.  I didn’t mean to overstate the amount of savings, but he’s convinced me that even my lesser estimation may have been too optimistic.

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