Big Changes in Medicare

According to a group of Congressional representatives, Medicare is due for a big change. A Democratic proposal was recently put forward that would allow the federal government to negotiate prescription drug prices for Medicare Part D. The agenda aligns with both the previous efforts of the Obama administration and plans put forward by the Clinton and Sanders campaigns. However, it will surely face significant Republican opposition, and has already come under fire from many bloggers and commentators.

In the last several months, U.S. drug prices have been the subject of significant public scrutiny, and the proposal is in many ways a response to public outrage at exorbitant price increases brought to light by the Shkreli incident. On average, U.S. prices for the 20 top-selling drugs are three times higher than in the U.K., making them a key driver of our burgeoning healthcare spending. Not surprisingly, they also limit access to needed drugs for many low income Americans. A recent poll showed that about 25 percent of Americans who take prescription drugs reported difficulty paying for them. Another survey compared medication access in the U.S. to other OECD countries. Almost a quarter of Americans reported not filling a prescription or skipping a dose due to cost, a much higher fraction than any other developed country.

One primary reason for these high prices is that Medicare is prohibited from negotiating prices with pharmaceutical companies. This forces Medicare to forfeit its tremendous bargaining power and gives companies the freedom to set prices as they please. The current proposal would enable Medicare, which has over 50 million beneficiaries (most of whom take multiple medications), to use its tremendous buying power to bring down Part D drug prices, thereby containing costs and improving access in the way other OECD countries do.

Criticism from skeptics has been swift and pointed,. The rhetoric against the proposal is largely two-fold: 1) it represents government overreach into a well-functioning, privately administered program, and 2) it will limit access to many drugs for seniors. Both have some merit. Indeed, Medicare Part D is one of few government programs that has come in significantly under budget with such high satisfaction among beneficiaries, an achievement attributed largely to its free market design in which private plans negotiate with pharmaceutical companies and compete with one another. For this reason, some see the proposal as government interference in a program that is working well. And if we look to other countries that directly negotiate drug prices, it is clear that restrictive formularies are a likely result, meaning some number of drugs will probably be excluded from Part D coverage.

However, these criticisms ignore the underlying issue: the unsustainable costs of our healthcare system. Medicare Part D may be administered effectively by the private sector, but the lack of government intervention comes with a huge price tag, one that burdens taxpayers and benefits big pharma. The rest of the world shows us that bringing down drug prices through government negotiation, a common-sense application of basic market principles, is crucial to financial sustainability. Furthermore, this proposal will not only drive pharma to cut prices, but will also promote cost-effectiveness in an industry that has benefited immensely from loose regulation and seen profit margins well above that of other sectors.

And although restrictive formularies may affect the care of some seniors, most of the drugs that will be excluded will be ones that are unreasonably expensive for the value they deliver to patients. Many such drugs have lower cost alternatives with marginal differences in efficacy. In fact, other OECD countries with restrictive formularies have better health outcomes for seniors, longer average lifespans, and lower costs, so the tradeoffs are likely not as worrisome as many forecast.

A recent policy brief estimated that the federal government could save between $15.2 and $16 billion annually if it negotiated Medicare Part D medication prices with drug-makers. Most critics have overlooked that these savings will be passed on to beneficiaries through lower premiums and taxes, so seniors (and the American people) stand to gain from the proposal as well. Indeed, system-wide costs in healthcare affect us all, and this proposal is an example of a responsible step we need to take towards financial sustainability.