Medicare Drug Prices and the Deficit


This opinion piece, published in the New England Journal of Medicine by a faculty member in the Department of Health Care Policy at Harvard Medical School, offers an explanation and justification for a Medicare drug price policy change proposed by President Obama. In 2006, Part D of Medicare for drug coverage was implemented with the intent of harnessing competition among Medicare prescription drug plans (PDPs) to lower drug prices. The author points out that market-based competition does not always work in this setting for a few reasons. First, he points out the competition only exists when there are multiple competing medications to treat the same condition. This is not always the case. Second, competition in prescription drug plans is undercut by a regulation that ‘protects’ certain drug classes from market-based competition by mandating coverage for all drugs in these classes. (This was put in place to prevent restarting access to life-saving medications.) It has been observed that, for some medications, Medicaid programs reimburse at a lower price than even the ‘best price’ obtained by the Medicare Part D programs. President Obama has suggested that Medicare beneficiaries who qualify for low-income subsidies should receive the same prices paid under the Medicaid program. The estimated savings from this proposal are $135 billion. The author suggests this is a ‘win-win’ proposal, by simply directing the Medicare drug price policy to provide for low-income Medicare beneficiaries the same ‘best price’ already in the system for Medicaid beneficiaries.

The author here makes an excellent point about the shortcomings of market competition to actually drive down medication prices. Most Medicare and Medicaid beneficiaries lack the pricing and medication option information to truly make informed-consumer choices among prescription drug plans. His point is also well taken that the government could save a great deal of money by more broadly applying already established “best prices” to all low income beneficiaries—whether through Medicare or Medicaid. His argument is based on the problems inherent in reliance on market competition to lower prices. What is completely absent from this essay—and from the entire Medicare drug price policy debate—is the concept of price negotiation. Most insurance companies and hospitals in this country negotiate with pharmaceutical companies to obtain best prices. This is also what most federal governments around the world do. It is high time for the US federal government, as one of the largest purchasers of medications, to negotiate directly for lower medication prices.

Keywords: Health Policy, Medicare Part D, Insurance, Pharmaceutical Services, Cardiology, Medicaid, Negotiating, Dissent and Disputes, New England, Poverty, United States

< Back to Listings