NCPA - National Center for Policy Analysis

Killing Competition in Prescription Drugs

November 14, 2011

President Barack Obama wants the Joint Committee on Deficit Reduction ("super committee") to kill market competition for prescription drug coverage chosen by workers and retirees in the Federal Employees Health Benefits Program (FEHBP).  In the president's proposal, the U.S. Office of Personnel Management (OPM), the agency that administers the FEHBP, would contract directly for pharmacy benefit management services on behalf of all federal workers, retirees and their dependents.  While the president claims that this will be a cost-saving measure that will lower prices for the program's 8 million beneficiaries, this conclusion does not seem to fit the facts, says Robert Moffit, a senior fellow with the Heritage Foundation.

  • While the FEHBP pays out $40 billion in claims annually, the administration estimates that its FEHBP drug price-fixing scheme would save $1.6 billion over 10 years.
  • Given that FEHBP drug expenditures alone (approximately 30 percent of total spending) will easily be in excess of $120 billion over the next 10 years, projected savings will come to less than 2 percent of drug savings.
  • In analyzing 569 million Medicare prescriptions, an econometrics research team found that 99 percent of all scripts and 100 percent of brand-name drug scripts were covered in the FEHBP, while the VA covered 72 percent of the total and just 41 percent of the brand-name scripts.

In order to obtain the cost benefits that President Obama discusses, an approved drug list would have to be created, with individual companies accepting or rejecting a take-it-or-leave-it offer from federal negotiators.  While this heavy-handed method may leverage consumers' collective demand in order to gain price concessions, it will politically cut numerous prescriptions out of the market, thereby reducing coverage options for the program's beneficiaries.  This point becomes all-the-more crucial when it is taken into account that the Congressional Budget Office estimates that no such cost reductions will be obtained by the use of leverage.

Source: Robert Moffit, "Bad Medicine for Federal Workers and Taxpayers: Killing FEHBP Competition," Heritage Foundation, November 2, 2011.

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