100 Hours: Medicaid Prescription Drug Program


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As we wait for the opening of the 110th Congress on January 4th, here is another of Nancy Pelosi's "100 Hours" Proposals: Allow Medicaid to negotiate lower prices with drug companies.

It sounds almost ridiculous, doesn't it. The fact that Medicaid isn't permitted to negotiate prices as part of the plan borders on criminal waste. That said, let's take a closer look.

Shortly after the legislation that created the drug program passed, Senator Frist, the then Majority Leader, asked the Congressional Budget Office to examine what the price effects would be if the section that prohibits the governments direct involvement in the negotiations were removed. The C.B.O. estimated that the effects would be "negligible":

We estimate that striking that provision would have a negligible effect on federal spending because CBO estimates that substantial savings will be obtained by the private plans and that the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree. Because they will be at substantial financial risk, private plans will have strong incentives to negotiate price discounts, both to control their own costs in providing the drug benefit and to attract enrollees with low premiums and cost-sharing requirements.

However, they go on to admit that there may be some savings for single-source drugs (i.e., drugs that have no competition) were the government to negotiate.

One of the biggest criticisms from the right regarding government intervention is a comparison between the VA's drug program and Medicaid Part D. They argue that they cannot be compared fairly as the VA's formulary, the drugs they will allow their doctors to prescribe, is very restrictive:

The VA’s highly restrictive national formulary excludes 62% of drugs approved by the FDA during the 1990’s and 81% of new medications approved since 2000. Even worse, the drug benefit designed for our nation’s veterans does not pay for a staggering 78% of new, high-priority prescription drugs approved by the FDA on an expedited basis since 1997 because of their life-saving impact. By comparison, commercial health plans, Medicare Part D drug plans, and state Medicaid programs cover the vast majority of new drugs and move quick to add coverage for most drugs given fast-track by the FDA.

That is a compelling argument if you look at it in a bubble. However, the same author, railing against the inevitability of government regulation of the pharmaceutical industry, states that with Medicare Part D the government will be responsible, at least in part, for purchasing 75% of prescription drugs by 2008.

With the government responsible for 75% of the pharmaceutical industry's market, you've got to believe that they can get prices similar to what the VA is getting without having to restrict their formulary as much. Heck, just the threat of having your drug left off the formulary that covers that much of the market should be mighty persuasive.

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