• What does Obama want on the Medicare drug benefit?

    As best I can tell from Obama’s speech and other reporting he has made vague references to the idea of using Medicare’s clout as a large purchaser to obtain lower drug prices for the program. (Sorry, I’m in a hurry and don’t have time to link to stuff.)

    What does he mean by this? I’ve been asked if Obama might mean that he wants Medicare to get the same drug prices as the VA. I don’t know if that’s what he means. I do know what it means if that’s what he means because I’ve done research in this area.

    The VA pays about 40% less for drugs than Medicare. One, among many, reason it obtains more favorable drug prices is that it has a tighter formulary. Though Medicare drug plans, on average, cover about 85% of the 200 most popular drugs, the VA covers only about 59% of them.

    Why such a big difference? One reason is that Medicare Part D plans, which are all private — no public option — are required to cover “all or substantially all” drugs in six classes and two drugs in all other classes. (This “all or substantially all” bit is in the regulations, which is why I put it in quotes.)

    How good a deal do you think you could get from a drug manufacturer if it knows you can’t walk away, can’t say, “no thanks, not covering your stuff”? Not as good a deal as you can get if you can walk away.

    Another related reason for the price difference is that the VA is a larger purchaser. Now some Medicare drug plans are very large too. But they are not as large as Medicare as a whole. So, if Obama is saying that he wants Medicare to bargain as a whole for drugs, and if he is saying he wants the program to have access to VA-like prices, he’s saying something huge.

    He’s also saying something that’s not likely to happen. There’s a reason the Medicare drug program is structured the way it is and that reason is no less compelling today then it was when it was written into law in 2003. Drug manufacturers like it that way. Moreover, last year the administration extracted concessions from drug manufacturers to win support for the ACA (I can’t recall the details on that at the moment). It is hard to fathom that with less control of government and in this political climate Obama is going to find a way to dramatically change Medicare’s drug benefit.

    Then again, as far as I know, nobody knows what he means yet.

    See also: https://theincidentaleconomist.com/controlling-prescription-drug-costs-frakt-pizer-hendricks-2008/ .

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    • I believe that the drug companies purchased the services of enough of our congressmen (and women) to write the Part D legislation so that the government could not negotiate for lower drug prices. Whatever these bribes cost, they are only a small fraction of the benefits the drug companies have received.
      It would be good if the government could negotiate (and also exert regulatory control on “effective” drugs) but with our current system of government which goes to the highest bidder, this is not likely. Obama has no control over this.

    • Austin writes: “Another related reason for the price difference is that the VA is a larger purchaser. Now some Medicare drug plans are very large too. But they are not as large as Medicare as a whole. So, if Obama is saying that he wants Medicare to bargain as a whole for drugs, and if he is saying he wants the program to have access to VA-like prices, he’s saying something huge.”

      The bargaining dynamics you refer to here are related to Uwe Reinhardt’s doubts about the public option. Reinhardt argued that establishing yet another insurance plan would reduce the bargaining power than any given plan has. This would would in turn make it easier “for providers — especially those consolidated into large medical group practices or hospital systems — simply to blow off any insurers seeking large discounts off charges.” Reinhardt described a public option having this effect as “a mouse that roars.”

      It was hard for progressives to believe this about a public option then, and my guess it’ll now strike people as counterintuitive that the VA gets a better deal than “Medicare” on prescription drugs. As you point out, however, one reason for this counterintuitive finding is that Medicare, as a single program, does not negotiate; it’s little mice do. (Reinhardt’s remarks are here: http://j.mp/gytkj0)