Part D Negotiations

Private competition in Medicare Part D is working. By allowing these private benefit plans to compete for members and negotiate prices, costs are being driven down for consumers and Medicare. According to analyses by the Centers for Medicare and Medicaid Services (CMS):

• The average premiums for the drug benefit coverage have fallen to $22 a month for this year. A 40% decrease than the coverage was projected to cost. CMS contributes this cost savings to strong competition and more beneficiary choices for the plans that work best for them.

• CMS reports that on average, beneficiaries also are saving nearly $1,200 annually on their drug costs.

• The total Medicare drug benefit cost $13 billion less in its initial year of 2006 than was budgeted for.

• The long term savings for Medicare are also greater. With CMS actuaries predicting a total cost over the span of 2004-2013 to be 30% lower, $189 billion less, than originally predicted before implementation.

All of these factors can be contributed back to the free market and allowing private plans to negotiate prices with the drug companies and providing more choices to the consumers.

A poll of Medicare beneficiaries by J.D. Power and Associates found that 45% of the beneficiaries surveyed were “delighted” with the Medicare drug benefit. This group gave their drug plan a 10 on a 10 point-scale. And another 35% of those surveyed gave their plan a score of 8 or 9. This shows that 80% percent of the beneficiaries are satisfied with their current plan.

The proponents of allowing the federal government to negotiate prices will often bring up the VA system and recommend Medicare use the same tactics for purchasing drugs. However, this methodology has many flaws from an economic perspective. It is true the VA uses several purchasing arrangements to get discounts on drugs. The VA has access to Federal Supply Schedule prices, where the government guarantees by law it must get the best market price. Meaning the federal supply schedule prices cannot exceed those of the lowest price charged to private institutions. The other arrangement the VA uses to drive down costs are Federal Ceiling Prices. This tactic states by law the government must receive a 24% discount on the average price paid by private purchasers. The problem comes when a large purchaser like Medicare tries to receive the same discounts. A 2000 report from the Government Accountability Office (GAO) state “Mandating that federal prices for outpatient prescription drugs be extended to a large group of purchasers, such as Medicare beneficiaries, could lower the prices they pay, but raise the prices for others.” If Medicare were to set price controls like the VA system, this would lead to higher prices for everyone else. The cost would be passed off employers, which in turn would be passed off to the employees. Allowing these price controls would essentially lead to higher prices for the rest of the American people.

The GAO reached this conclusion by researching what happened when the government forced drug manufacturers to pay rebates to state Medicaid programs. Much like the VA system, the Medicaid rebates gave the government programs the best price in the market. So the drug manufacturers simply raised their prices to the private purchasers, which lower the rebates paid to the Medicaid programs. Drug manufacturers had to eliminate the best discounts for their private purchasers because they new they would have to provide a better