Medicare: A Plan B for Part D

One of the most popular benefits of Medicare is the Part D prescription drug program, which enables seniors and the disabled to buy taxpayer-subsidized coverage for many of the most widely prescribed medicines. When it created the costly benefit in 2003, though, Congress provided no way to pay for the subsidies, which have cost more than $300 billion so far. Worse, it barred the government from negotiating with drug makers for better prices — an extra gift to the pharmaceutical industry, which already stood to gain from the increased demand for its newly subsidized products. Now that policymakers are casting about for ways to save money on Medicare, they should allow it to take advantage of its market power.

Medicare Part D is often held out as a successful model for government benefit programs because it uses market forces to help hold down costs. Specifically, private insurers vie with one another to sign up Medicare beneficiaries, competing both on price and on the specific drugs they cover. Just how effectively those forces have held down Part D’s costs is subject to some debate, however. Advocates contend that Part D has cost the government significantly less than originally projected. Skeptics say that much of the savings come from the paucity of groundbreaking new drugs and the emergence of generic versions of many important older ones.

Nevertheless, the competition harnessed by Part D undoubtedly lowers costs to some extent. Today, insurers negotiate with drug manufacturers for discounts to help lower their premiums; not surprisingly, economists have found that the more beneficiaries an insurer signs up, the deeper the discounts it obtains.

So why not let Medicare negotiate directly on behalf of all its beneficiaries, as the Veterans Administration does? Drug manufacturers argue that there’s little difference between Medicare “negotiating” and the government setting a take-it-or-leave-it price that the industry couldn’t afford to reject. Price-setting would be problematic — among other things, it would encourage manufacturers to shift costs from Medicare beneficiaries onto other customers — but Congress can take steps to prevent the program from dictating instead of bargaining.

The downside of reducing Medicare’s spending on drugs is that it would cut into drug makers’ revenue, which industry lobbyists warn would reduce investment in the research and development that leads to therapeutic breakthroughs. There are mitigating factors, however. The industry’s investment is being buoyed now by the arguably excessive profits the industry extracts from Medicare recipients. Part D wasn’t intended to be an indirect subsidy for pharmaceutical R&D.; Besides, a 2010 study showed that about half of the innovative drugs approved over a 10-year period resulted from discoveries by universities and biotech firms, not drug manufacturers, most of whose new products were variations of older ones.

Lifting the ban on Medicare negotiating drug prices wouldn’t solve the program’s long-run fiscal problems, but it could save billions of dollars annually — particularly on treatments for which there are many alternatives. That’s reason enough for Congress to take back the gift it gave the pharmaceutical industry nine years ago.