One of the bedrock principles of our economic system is that someone who buys more of a product receives a pricing discount. Costco and Sam's Club stores are founded on this principle, but so is the quintessential American deal of "buy one, get one free." However, there's a major exception to this rule: Medicare is prohibited by law from negotiating lower prices from drug companies. This provision was part of the Medicare Prescription Drug, Improvement, and Modernization Act that created Medicare Part D, the prescription drug plan for seniors that President Bush signed into law on Dec. 8, 2003. Since then, Democrats have campaigned to change the law.
On Jan. 12, 2007, unanimous support from Democrats in the House led to the passage of the Medicare Prescription Drug Price Negotiation Act. If it becomes law, it would require the Secretary of Health and Human Services to negotiate with pharmaceutical manufacturers for lower drug prices. Since drug companies sell their many brand-name drugs for nearly 50% less in other countries compared to the United States, and since Medicare is the world's largest buyer of prescription drugs, having the secretary negotiate with drug companies to sell their drugs at the same prices paid by consumers in other countries would cause a huge hit to drug companies' top and bottom lines. It would be very important news.
There's one part of the U.S. government that negotiates with drug manufacturers. Currently, the Veterans Health Systems, another huge purchaser of prescription drugs, is able to buy prescription drugs from manufacturers at a significant discount. Wouldn't empowering Medicare to save taxpayers' money be widely embraced as a great idea? After all, the 75-year unfunded liability for Medicare Part D has been estimated to cost trillions of dollars, so one might imagine that there would be an outpouring of support for the Senate to pass its version of the bill and ultimately have the legislation be signed into law. How did investors in drug companies react to this news last week?
There was a collective yawn, deafening in its silence. Last week, Pfizer
The first reason is aptly expressed by Schoolhouse Rock's classic song lyrics, "I'm just a bill; yes, I am only a bill. And I am sitting here on Capitol Hill." Yes, there's certainly a huge difference between a bill and a law. Getting a bill to authorize the HHS Secretary to negotiate prescription drug prices through the Senate will be much harder. Even if the bill made its way to President Bush, he has previously stated that he would veto it. Although the bill had strong support in the House, passing 255-170, it would need to pick up some more support to overturn a veto.
Second, if somehow the bill did become signed into law -- unexpected things do occur in politics from time to time -- it isn't clear how aggressively HHS Secretary Leavitt could negotiate with drug companies. The reason that the Veterans Health System can effectively negotiate lower prices is because of the VA formulary, a list of preferred medications that numbers around 1,300 drugs (compared to the 4,300 drugs available on a typical Medicare Part D plan). If a drug is not on the formulary, then veterans will not have easy access to it. Since the bill does not allow Medicare to remove drugs from its approved list if the drug company does not agree to a significant discount, how could there be a meaningful negotiation?
Third, since there's not the same level of public concern over this issue of high prescription drug prices that was present five years ago, three years ago, or even last year when the implementation of Part D got off to a bumpy start, there won't be political pressure to make changes. Medicare Part D is popular with seniors, with one poll showing higher than 80% support for the program. Another study stated that the share of Medicare beneficiaries with comprehensive drug coverage increased from 59% in 2005 to 90% in 2006.
Even those lacking health insurance are better off now than at this time last year. Wal-Mart
So it's not surprising that a recent Kaiser Family Foundation/Harvard School of Pubic Health poll found that the cost of prescription drugs was not an important issue for voters in the November election. Even though the same survey found that 80% of those polled agreed with the statement "allowing the federal government to negotiate with drug companies for lower prices makes sense because the government already negotiates lower prices for members of the military and veterans," one should not expect changes in the Medicare Part D Program anytime soon.
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Fool contributor Dr. Michael Cecil is a cardiologist and the author of Drugs for Less: The Complete Guide to Free and Discounted Prescription Drugs. If you would like to discuss this article, feel free to email him. The Fool has a disclosure policy, and Dr. Cecil does not own any of the stocks mentioned in the article.