2 March 2017 - The president has described drug prices as “astronomical” and vowed changes, including having the government negotiate on behalf of the Medicare and Medicaid programs. 

This is hardly new territory; proposals to control “runaway” drug prices are a political perennial. These ideas are more rhetoric than real solution, largely because the best chance in controlling drug prices rests in leveraging a powerful mechanism that already exists: market competition.

Government “negotiation” simply won’t work. A call for government “negotiation” is really just a pledge for price-fixing in disguise. Price-fixing never works, and price-fixing in one sub-market like Medicare is usually even more damaging to that market. One might think that an administration could leverage millions of Medicare beneficiaries to extract lower prices, but the reality is that private drug plans and pharmacy benefit managers (PBMs) have already done this, and quite successfully. Medicare Part D plans currently compete to achieve lower costs and deliver superior customer service. 

This is why the Medicare prescription drug plan has come in at less than half of its original projected cost and still receives beneficiary satisfaction ratings of 85% or more. Moreover, private plans can use a formulary to reward low-priced drugs, while the government cannot. In effect, the private sector prescription drug plans already have all the market-based leverage available.

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