What cutting Medicare drug prices looks like

Sam Baker reports,

“The President’s proposal to tamper with a program that works well would not yield any benefit for seniors,” PhRMA said.

This is a good time to remind the world about my highly relevant paper with Steve Pizer and Roger Feldman (ungated working paper version here). Plagiarizing myself, the key findings are:

  • 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).

I hope this information is taken into consideration in the debate.


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