Medicare And the Market

By Mike Leavitt
Thursday, January 11, 2007

We all want people with Medicare to get the prescription drugs they need at the lowest possible prices. The issue before Congress this week is how best to do that. Should consumer choice and private-sector competition determine prices -- or should government?

The success of the Medicare prescription drug benefit provides strong evidence that competition among private drug plans has contributed significantly to lowering costs. The average monthly premium has dropped by 42 percent, from an estimated $38 to $22 -- and there is a plan available for less than $20 a month in every state. The net Medicare cost of the drug program has fallen by close to $200 billion since its passage in 2003.

Seniors and people with disabilities like the benefit. Studies consistently show that three-quarters of Medicare beneficiaries are satisfied with their coverage. Individuals like being able to choose the plan that best fits their needs. A single, one-size-fits-all drug plan would have made the choice easier, and Congress did create a standard plan. But fewer than 15 percent of enrollees have selected that standard plan -- opting instead for plans with lower premiums, no deductibles and enhanced coverage.

Despite the success of the benefit, some people believe government can do a better job of lowering prices than a competitive marketplace. Legislation under consideration would require the secretary of health and human services to negotiate and set the prices of drugs. In effect, one government official would set more than 4,400 prices for different drugs, making decisions that would be better made by millions of individual consumers.

There is also the danger that government price setting would limit drug choices. Medicare provides access to the broadest array of prescription drugs, including the newest drugs. But price negotiation inevitably results in the withholding of access to some drugs to get manufacturers to lower prices.

The Department of Veterans Affairs, often cited as an example of how government can negotiate prices, operates an excellent program for veterans, but the VA formulary excludes a number of new drugs covered by the Medicare prescription benefit. Even Lipitor, the world's best-selling drug, isn't on the VA formulary. That may be one reason more than a million veterans are also getting drug coverage through Medicare.

Some observers point to the massive buying power of the federal government as the means to exert clout over drug companies, but the federal government has nowhere near the market power of the private sector. Private-sector insurance plans and pharmacy benefit managers, who negotiate prices between drug companies and pharmacies, cover about 241 million people, or 80 percent of the population. Medicare could cover at most 43 million.

The independent Congressional Budget Office has said that government price negotiation would have a "negligible effect on federal spending." And previous experience with Congress and Medicare regulating drug prices has not been reassuring. Medicare Part B, which covers physician services, outpatient hospital care and other services, sets the prices for some medicines -- notably a number of cancer drugs. It has a history of reimbursing at rates substantially greater than prevailing prices. In 2005, Part B drug spending increased by almost 20 percent.

If the federal government begins picking drugs and setting prices for all Medicare beneficiaries, administrative costs would add a new burden to taxpayers. The Department of Health and Human Services would have to hire hundreds of new employees. Legions of lobbyists would follow, each seeking higher Medicare payments for the drug companies they represent. As a Post editorial noted in November, "having the government set drug prices is a sure way of flooding the political system with yet more pharmaceutical lobbyists and campaign spending."

There is a proper role for government in setting standards and monitoring those who provide the benefit. We should ensure that beneficiaries have access to medically necessary treatments. But government should not be in the business of setting drug prices or controlling access to drugs. That is a first step toward the type of government-run health care that the American people have always rejected.

There are many ways the administration and Congress can work together to make health care more affordable and accessible. But undermining the Medicare prescription drug benefit, which has improved the lives and health of millions of seniors and people with disabilities, is not one of them.

The writer is secretary of health and human services.

© 2007 The Washington Post Company