CEPR - Medicare Could Lower Drug Costs if It Negotiated Prices Directly With Drug Companies

Washington, DC -- Medicare could pay lower prices for prescription drugs if it negotiated directly with the pharmaceutical industry rather than through private insurance companies, according to a report by the Center for Economic and Policy Research.

The report, "The Savings from an Efficient Medicare Prescription Drug Benefit," found that the drug benefit is far more costly than necessary because Congress did not make efficiency a top priority when it created the Medicare Modernization Act (MMA). Instead, the new drug plan ensures that private insurance companies provide the benefit and play an expanded role in the Medicare program.

"The Medicare Modernization Act costs the government and beneficiaries considerably more than is necessary," said economist Dean Baker, CEPR's co-director and author of the report. "If Medicare could negotiate directly with drug companies it could save the federal and state governments hundred of billions of dollars and cut insurance premiums."

The study projects the potential savings that would result if Medicare could pay the same prices for drugs as countries like Australia and the program was administered in a more efficient manner. The potential savings are so large that the current projected budget for the program would be enough to fully finance the benefit with no contribution from the beneficiaries whatsoever. In fact, it would still leave a surplus of $40 billion (over the years 2006-2013) which could be divided between savings to the state and federal governments.

The Congressional Budget Office (CBO) claims that Medicare must pay higher prices for drugs than healthcare systems pay in other wealthy countries, such as Australia and Canada. It claims that this is necessary because Medicare could not achieve substantial price reductions by negotiating directly with the pharmaceutical industry, which is what healthcare systems in these other countries do.

The report notes that this claim appears to contradict CBO's own evidence. Just as CBO missed the stock bubble, and overstated capital gains tax revenue by almost $500 billion in its 2001 budget projections, CBO has apparently made a major mistake in its projections. If this error goes uncorrected, it will be a substantial obstacle to designing a more efficient, user-friendly drug benefit.

The Center for Economic and Policy Research is an independent, nonpartisan think tank that promotes democratic debate on the most important economic and social issues affecting people's lives. CEPR's Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.