Look Ma: Medicaid is doing it!

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Before I deleted the site yesterday, I had some commentary by Kevin Drum on Medicare negotiating lower prices for prescription drugs:

But there’s a fairly simple solution to this, one that only the Wall Street Journal even bothers to mention:

[An] approach Democrats could try would be requiring drug makers to give Medicare beneficiaries their lowest price, as companies must for Medicaid, the state-federal health-insurance program for the poor and disabled.

This, of course, is common practice in the business world, where large buyers routinely negotiate “most favorable pricing” clauses into their contracts. It also addresses the most infuriating aspect of current pharmaceutical policy: the bulk of the companies and the bulk of the R&D in the pharmaceutical industry are done in America, but for some reason consumers in every other country in the world get lower-priced drugs than Americans.

An MFP clause with appropriate exceptions takes care of this, and it’s something the federal government already knows how to do since Medicaid currently operates this way. It’s not price control, since pharmaceutical companies wouldn’t be required to supply drugs at any particular price, but if they did supply them at a price to anyone else — or any other country — then they’d also be required to offer the same deal to Uncle Sam. This is pretty standard practice when you’re the biggest buyer in an industry. Just ask Wal-Mart.

And if it turns out that giving Americans the Canadian/French/German/whatever price prevents pharmaceutical companies from making money, then they’ll have to raise prices in other countries. But that’s OK. There’s no reason American taxpayers should be subsidizing healthcare for the rest of the world, after all.

Kevin wasn’t the only one talking about this. Dean Baker of TAP’s Beat the Press was commenting about this Washington Post article:

The article discusses the possibility of having Medicare negotiate drug prices directly with the industry, a position strongly opposed by the Washington Post editorial board. One would be hard-pressed to figure out what is at issue after reading this piece.

For example, the article raises the possibility that if Medicare negotiated prices directly with the industry, it “could drive prices higher.” Yes, this must be why the industry is lobbying so hard against having Medicare negotiate prices. They are worried that it would cause them to charge higher prices and get higher profits.

Finally, it wouldn’t be a health care post without Ezra chiming in:

Pharma is arguing Medicare’s user base is so massive that government negotiation amounts to de facto price controls, which would decrease innovation. So though Pharma accepts such “price controls” from the VA, Canada, France, Germany, Japan, and Medicaid — all of who pay far less than Medicare — innovation cannot sustain the addition of Medicare’s patients.

We should hope not. 2/3rds of Pharmas current R&D budget goes not towards creating new drugs for killer conditions, but towards crafting copycats of other blockbuster drugs, which evade the patent protections placed by competitors. Another massive proportion of the actual research is conducted in the public sector and licensed out at miniscule prices through the Hatch-Waxman Act. Indeed, lower prices and innovation aren’t either/or, they’re both/and. Were I the Democrats, I’d decree that some proportion of the savings from negotiation go to the NIH to fund the lifesaving research that gets turned into lifesaving drugs, rather than going to subsidize the useless research that goes to create a knockoff version of Lipitor.

Pharma isn’t fighting this battle because they’re terrified of losing even one dollar that could go towards innovation. They already spend twice as much on advertising as they do on R&D. And most of the R&D doesn’t “innovate” at all. They’re waging this war because they want to make more money. That’s their job. But it’s the governments job to advocate for the public interest, and better pharmaceutical prices, particularly coupled with more investment into cutting edge, lifesaving drug research, is the public interest.

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