Among many pieces of legislation that the new Democratic-controlled Congress is expected to take up this year is a provision that would allow the U.S. Government to directly negotiate prices with pharmaceutical companies. AARP has weighed in with a
survey that says 87% of respondents favored allowing the government to use its “bargaining power” to negotiate discounts. What this is really saying is that 87% of survey respondents have no understanding how the pharmaceutical and wholesale/PBM industries really work.
So, at first glance, this seems like a good idea that will save the government money on prescription drug costs. Unfortunately, the whole idea of direct price negotiations rests on a lack of understanding about how drugs are paid for in this country.
Perhaps the most succinct and articulate description of the economics of prescription drugs is
Peter Keating’s column in the March 2007 issue of Smart Money. In the piece, he explains that “Drug makers don’t typically sell directly to insurance companies,” and that this role is filled by companies called Pharmacy Benefit Managers (PBMs).
Unfortunately, the PBMs chew up much of the discounts, so only a small part gets passed on. As Keating brilliantly articulates, unless Congress fixes PBMs, any direct price negotiations will likely not result in any significant prescription drug savings—for either the government or consumers.
I’m all for the free market system. If the government thinks it can successfully negotiate lower prices on prescription drugs, why not try? After all, this is the same government that was able to successfully negotiate a $600 toilet seat and a $400 hammer. Think that was just the 1980s? These days the government is successfully negotiating $20 ice-cube trays ($0.99 at the grocery store) or $22,797 mini-fridges ($135 at Sears). Still think that the government can successfully negotiate drug prices?
So, at first glance, this seems like a good idea that will save the government money on prescription drug costs. Unfortunately, the whole idea of direct price negotiations rests on a lack of understanding about how drugs are paid for in this country.
Perhaps the most succinct and articulate description of the economics of prescription drugs is Peter Keating’s column in the March 2007 issue of Smart Money. In the piece, he explains that “Drug makers don’t typically sell directly to insurance companies,” and that this role is filled by companies called Pharmacy Benefit Managers (PBMs).
Unfortunately, the PBMs chew up much of the discounts, so only a small part gets passed on. As Keating brilliantly articulates, unless Congress fixes PBMs, any direct price negotiations will likely not result in any significant prescription drug savings—for either the government or consumers.
I’m all for the free market system. If the government thinks it can successfully negotiate lower prices on prescription drugs, why not try? After all, this is the same government that was able to successfully negotiate a $600 toilet seat and a $400 hammer. Think that was just the 1980s? These days the government is successfully negotiating $20 ice-cube trays ($0.99 at the grocery store) or $22,797 mini-fridges ($135 at Sears). Still think that the government can successfully negotiate drug prices?