Hooked on Drug Money: Will Congress Take a Stand on Medicare?

01/10/2007 12:00am

Dean Baker
Truthout, January 10, 2007

See article on original website

It’s payback time, as the lobbyists say in Washington. One of the key planks in the Democrats’ election platform was changing the Medicare drug benefit by allowing Medicare to negotiate lower prices with the pharmaceutical industry. While this may not have been as important to their victory as the war, voters were outraged by the Medicare drug bill approved by Republican Congress. The benefit was designed to enrich the pharmaceutical and insurance industries at the expense of taxpayers and beneficiaries.

Now the Democrats are in a position to make good on their promise to reform the bill, and the pharmaceutical industry is going all out to protect its future profits. The basic story here is very simple. The prices paid by the insurers participating in the Medicare program are far higher than the prices paid by the Veterans Administration or governments that negotiate directly with the drug companies.

If Medicare negotiated similar discounts with the industry, it could save taxpayers and beneficiaries between $300 and $400 billion dollars over the next decade. This comes to between $2,500 and $3,500 per household. In technical terms, this is real money.

In order to protect its profits and the big bucks earned by the CEOs, the industry is pulling out all the stops to make its case. This means making every claim imaginable, some of which are even contradictory.

Claim #1 is that the government cannot get lower prices than the private insurers. This could be true if the people running the Medicare program were uniquely incompetent. We have the data. The Veterans Administration pays prices that average 40 percent less than the insurers participating in the Medicare program. The same is true of the Canadian government, the Australian government, and all the other governments of wealthy countries that run health care programs. If we really have such incompetent people running Medicare, then we need to replace them with qualified managers, but that is not an argument against reforming the program.

It is important to remember that drugs are cheap. Wal-Mart is selling prescriptions of most generic drugs at $4 a piece. The only difference between the drugs that Wal-Mart sells for $4 and the ones that cost hundreds of dollars is that the latter enjoy government-created patent monopolies. It is only these patent monopolies that make drugs expensive; in nearly all cases they are cheap to produce. In principle, nearly all drugs could be profitably sold at $4 per prescription.

Claim #2 is that if Medicare negotiated prices, beneficiaries would only be able to get the drugs chosen by the government. This is wrong as well. The Veterans Administration has a formulary with preferred drugs available at lower prices. If patients have a need for drugs not on the formulary, they can still get them, they just pay a higher price – a price comparable to what the private insurers pay now.

Claim #3 is that if Medicare paid lower prices, then the industry wouldn’t have the money to finance research. While lower profits would reduce the amount of money available for research, the impact on the development of useful drugs is likely to be very minor. The industry takes in more than 6 dollars for every dollar it spends on research. Furthermore, close to two-thirds of research spending goes to developing copycat drugs that largely duplicate the function of existing drugs. This means that the industry takes in close to $20 for every dollar it spends on developing breakthrough drugs.

Lower profits may have a marginal impact on the process of developing new drugs, but so would a snowstorm that shut the labs for a few days. There are far more efficient ways to finance drug development then shoveling hundreds of billions of dollars to the big drug companies in the hope that a small fraction ends up financing useful research. (Of course, if the industry is right that Medicare couldn’t negotiate lower prices [claim #1], then we don’t even have to worry about claim #3.)

The industry doesn’t have much of a case, and according to the polls, it doesn’t have much popular support either. But it does have money. It uses this money for campaign contributions to members of Congress and presidential candidates, to buy ads in newspapers that support their case, even to make contributions to National Public Radio.

But, the basic story is simple. The pharmaceutical industry wants the government to reach into your pockets to increase their profits. Some people may die in the process, but at least the CEOs will get big paychecks.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. You can find it at the American Prospect’s web site.

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