NCPA - National Center for Policy Analysis

Weak Idea at Bernie's: Bureaucrats Should Not Negotiate Drug Prices

April 24, 2017

NCPA Senior Fellow Devon Herrick writes at Townhall:

Senator Bernie Sanders and Representative Elijah Cummings -- along with a few other liberal Members of Congress -- want to change the way Medicare purchases drugs for seniors. Even President Trump has perpetuated the idea that having the government negotiate prices directly with drug makers would lower Medicare\'s drug costs. It is a popular talking point mainly because many Americans naively assume Medicare does not haggle over the price of drugs. However, it\'s a dumb idea; drugs used by seniors are negotiated through an elaborate bargaining process.

Medicare Drug Plans. The Medicare Part D drug program is run by private firms, who manage drug benefits for seniors. Medicare drug plans use a variety of techniques to control drug costs, including preferred-drug lists, tiered formularies, use of mail-order drug suppliers, negotiated prices with drug companies and drug distributors, and contracting with exclusive preferred pharmacy network providers.

Private drug plan managers negotiate drug prices, often pitting each drug in a given class against competing drugs for a spot in a formulary. A formulary is the schedule of drugs covered by each plan. It varies slightly from one drug to the next, but on average, plan managers obtain discounts of about one-third off list prices. How do they do it? The pharmacy benefit managers (PBMs) who manage Part D drug plans have massive buying power. More importantly, PBMs also have the ability to say "no" and refuse to cover a given drug if the price is not competitive with what competing drug makers charge for similar drugs. It's free market competition. The winning bidder is guaranteed a huge boost in market share if its drugs are approved for a large number of plan formularies.

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