The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Big Pharma DOES Negotiate Drug Prices

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.

On March 7, 2017, President Trump tweeted he was "working on a new system where there will be competition in the Drug Industry.  Pricing for the American people will come way down."  The next day, in a meeting with Representatives Elijah Cummings (D-Md.) and Peter Welch (D-Vt.) , the president reiterated that he wanted to do something about U.S. drug prices.  The Congressmen said he was "enthusiastic" about the issue.  On March 22, 2017, the President promised members of the Congressional Black Caucus, that his administration would "bid down drug prices, and we’re going to try to have the lowest prices anywhere in the world from really the highest."

If President Trump means that the government should bid on drugs, that usually means price controls, not free market negotiations.  Any costs that are "saved" are shifted to the private sector or absorbed by the seller, which leads to fewer products being developed and fewer employees being hired.

For proponents of the free market, it is concerning that Ezekiel Emanuel, one of the prime architects of the Affordable Care Act (Obamacare), is providing advice to the President.  According to a March 21, 2017, Chicago Tribune article, Emanuel has met with the President three times on healthcare policy.  Emanuel has a history of advocating for the heavy hand of government and price controls for the pharmaceutical industry.

In reality, the industry vigorously competes and negotiates drug prices in the private sector market and in Medicare Part D, the prescription drug benefit program for seniors.  In other government drug programs, such as those provided by the Veterans Health Administration (VA) or Medicaid, prices are statutorily set and there are no price negotiations.  In other words, these programs utilize price controls and resulting "savings" are shifted elsewhere.

Data shows that private negotiations have not only worked well in Medicare Part D, they have been better than initially anticipated.  In 2005, the Congressional Budget Office estimated Medicare Part D would cost taxpayers $172 billion by 2015; its actual 2015 cost was $75 billion.  Compare these results to Medicare, where price controls are widely utilized.  In 1967, the House Ways and Means Committee predicted that the entire Medicare program would cost taxpayers $12 billion by 1990; the cost that year was $98 billion.

Unfortunately, big-government aficionados keep trying to destroy the private market in Medicare Part D with price-control measures.  Two bills have been introduced in the 115th Congress, H.R. 242 and S. 41, both named the "Medicare Prescription Drug Negotiation Act of 2017."  The bills would amend current law, striking the "non-interference clause" in the Medicare Part D law.  The clause does not mean that negotiations do not occur.  The provision simply forbids the Secretary of the Department of Health and Human Services from interfering in the private negotiations that occur among pharmaceutical companies, pharmacy benefit managers, and pharmacies.

It is unclear what the president means when he says he wants to bid down drug prices and try to have the lowest drug prices in the world.  Hopefully he does not want the U.S. to be like many other countries that use price controls and rationing to control healthcare costs.  As former 2004 Democratic presidential candidate and Democratic National Committee Chairman Howard Dean appropriately wrote in a September 18, 2015 New York Times letter to the editor, "The American drug industry is by far the most successful and innovative in the world in addition to being the most expensive because we are the only country that pays the true research and development costs, not only for Americans, but for the rest of the world as well."

Howard Dean is correct.  Currently, the U.S. is responsible for the majority of the world’s biopharmaceutical research, as aptly demonstrated in the 2016 Winter edition of R&DMagazine.  When it comes to global investment in pharmaceutical and biotech research, the U.S. leads the pack with 56 percent.  The closest competitor is Germany at 16 percent, the United Kingdom is at 7 percent, and Japan is at 5 percent.

If the U.S. adopts the rest of the world’s price control model, life-saving biopharmaceutical products will go undiscovered because investment and research funds will be dramatically reduced.  As Citizens Against Government Waste laid out in its December 2016 Issue Brief, "Throughout history, governments around the world have tried to control the prices of goods and services.  These efforts have disrupted the marketplace and created shortages or excesses.  But just like zombies, price controls keep rising from the dead because politicians seem to think they can create a better methodology.  They never learn that price controls do not work and end up hurting the economy, consumers, and taxpayers."

A better option would be for President Trump to negotiate with U.S. trading partners and have them contribute their fair share toward the costs of biopharmaceutical research, a burden disproportionately paid for today by U.S. taxpayers and consumers.

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