Fixing Medicare Drugs & Attacking Crime

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Dean Baker
Sun-Sentinel (FL), October 19, 2006

Americans love crime dramas. This is a good thing, because the people opposed to reforming the Medicare drug bill insist that reform efforts will be stifled by a conspiracy by the major drug companies. If these reform opponents are right, then successful reform of the Medicare drug bill might require dragging the top executives of Pfizer, Merck, Eli Lilly and their collaborators before Congress and grand juries to get at the truth.

Here's the story. The Medicare drug benefit passed by Congress in 2003 explicitly prohibited Medicare from offering its own drug plan or from negotiating directly with drug companies on behalf of beneficiaries. In addition to increasing the administrative costs of the program (private insurers' costs are far higher than Medicare's), this restriction also meant that the drugs purchased under the plan would be far more expensive.

On average, the drug prices paid by private insurers are nearly twice as high as the prices negotiated by the Veterans Administration or governments such as Canada or Australia. This means that the Medicare drug benefit costs nearly twice as much as necessary.

If seniors could pay the same prices for drugs as the VA or as people in Canada, the savings would be so large that seniors could get all their drugs for free and the government would still pay less than it does under the current system.

Recognizing the waste in the current system, several members of Congress have proposed reforming the drug plan by allowing Medicare to offer its own plan and negotiate prices directly with the drug industry. Since Medicare would be an enormous buyer under such a system, it would be reasonable to expect that it could negotiate prices that are comparable to those paid by the VA or Canada.

However, many supporters of the current system claim that the drug companies would charge Medicare as much as they do private insurers. In other words, even though Medicare would be a larger buyer than Canada (and much larger than the VA), supporters of the current Medicare drug plan claim that the pharmaceutical industry would still charge Medicare prices that are twice as high as the price for which it sells the same drugs to the Canadian government.

It's important to remember that the drug companies earn profits on the drugs they sell to Canada and the VA, otherwise they would not sell them. No law requires it. This means that they would still make money if they sold drugs at the same price to Medicare.

But supporters of the unreformed drug bill insist that the drug companies would refuse to sell Medicare drugs at the same price charged to Canada or the VA.

Given the basic facts, it seems that the only way drug companies would refuse to sell drugs to Medicare at the same price as Canada or the VA is if all the major companies agreed to demand higher prices from Medicare. Of course, collusion of this sort is against the law.

None of us can know exactly how the drug companies would respond if we changed the law to allow Medicare to negotiate directly with the industry. It is possible that they would agree to charge the same prices that they charge the VA or the Canadian government, saving seniors and the government hundreds of billions of dollars.

However, supporters of the current drug plan may be right, and the major drug firms may collude and hold out for higher prices. But this is not an argument against reforming the Medicare drug bill. It just means that successful reform will require breaking the conspiracy.

Then we will get lower drug prices, and also some free entertainment in the process. If some corporate criminals get taken off the street as well, few voters will object.


Dean Baker is co-director of the Center for Economic and Policy Research, in Washington, DC (www.cepr.net).