The War on Drug Savings

Michigan and Vermont figured out a way to save money on the cost of prescription drugs purchased by those state's Medicaid programs. By joining together to increase their buying power, the two states were able to negotiate lower prices for the medicines they purchased.

The Bush administration seems to think reducing the cost of prescription drugs is a bad thing:

The Bush administration rejected a program that saved Michigan and Vermont millions of dollars by allowing them to negotiate jointly lower prescription prices from drug companies, Michigan Gov. Jennifer Granholm said Monday.

The two states were the first to pool resources for buying drugs under the state-federal Medicaid program that provides health care to the poor. Other states, including New Hampshire and South Carolina, were considering joining.

Granholm, a Democrat, told the Associated Press that the federal Centers for Medicare and Medicaid Services rejected the program late Friday on grounds it violated federal procurement procedures. Eileen Kostanecki, Granholm's health care adviser in Washington, said Medicaid officials told her to expect an official rejection letter next month. …

Kostanecki said Michigan saved about $40 million in drug costs through the program in 2003, including $8 million from multistate bargaining. Neither Michigan nor Vermont knows whether it will be allowed to collect on the discounts they're owed if the program should end, she said. …

Granholm … said she was surprised by the decision because the Bush administration has encouraged states to cut drug costs.

This news came out on the same day as the results of an AP/Ipsos poll that found, as AP writer Will Lester reports:

Almost a third of Americans say paying for prescription drugs is a problem in their families, and many are cutting dosages to deal with the crunch, according to a poll by the Associated Press. …

The poll conducted for the AP by Ipsos-Public Affairs found most Americans either take prescription drugs or someone in their family does. Of those, 33 percent said their families have trouble paying at times. …

The high cost of prescription drugs will be an important issue in the presidential campaign, said eight in 10 in the poll. Almost half said it will be "very important."

That last point might seem like good news for the Bush administration. After all, they just bullied a budget-busting Medicare prescription drug benefit through Congress. Why, this bill was such a high priority for the Bush administration that they went so far as to mislead Congress as to its full cost in order to ensure its passage.

Unfortunately, Bush's Medicare bill also made illegal two common-sense cost-saving steps that the AP has learned are rather popular:

In November, Congress passed a Republican-written Medicare prescription drug benefit that goes into effect in 2006. …

Two popular steps that could have made prescription drugs more affordable were forbidden by the new law:

–Letting Americans import drugs from Canada, Mexico and other countries, an idea supported by 65 percent of those polled for the AP.

–Giving the government authority to negotiate with pharmaceutical companies for lower drug prices, favored by 71 percent.

I appreciate that there are arguments against the first proposal, although I'm not sure what to make of them. In any case, importing drugs from Canada does not strike me as a viable long term solution.

But what earthly reason is there for prohibiting the government from using its clout as a massive consumer to negotiate for lower prices? What is the procurement logic that says purchases must be made at the highest price demanded by suppliers?

Is there a charitable interpretation I'm missing here? Or is this really, as it appears, a brazen subsidy for the pharmaceutical industry at the expense of taxpayers and the common good?

  • Charles

    Reminder: one of the largest Big Pharma stockholders is Bill Gates. And what’s good for Bill Gates is good for America. Right?
    It should come as no surprise that Bill Gates personally lobbied Bush on pharma issues.

  • none

    The conspiracy nuts used to say that the US government was getting alien technology in exchange for allowing the aliens to abduct people. In fact, the US government is getting pharmaceutical technology by allowing the big pharmas to gouge their US patients. Other countries have been less inclined to play along, although the US has been using trade negotiations to try and drag them into the arrangement.
    Now, if the US were to stop playing along, then the pharmas would have less money to spend on drug research. But the US people and government would have more money to spend on other things – possibly even disease prevention. It’s hard to tell what the end result would be, but it’s never going to happen anyway…

  • none

    “… Bill Gates personally lobbied Bush on pharma issues.”
    Charles, this is the first time I have read this claim, and I am unable to find via Google any reference that would support this. Bill Gates is mentioned often in Drug context, but always in a third-party illustrative way.
    If my Googling is inadequate, I would appreciate a link showing that. I have hard time accepting your comment as fact.

  • none

    “… Bill Gates personally lobbied Bush on pharma issues.”
    Charles, this is the first time I have read this claim, and I am unable to find via Google any reference that would support this. Bill Gates is mentioned often in Drug context, but always in a third-party illustrative way.
    If my Googling is inadequate, I would appreciate a link showing that. I have hard time accepting your comment as fact.

  • Ross Judson

    The problem looks something like this: Who is the cost control in the current system?
    Drug companies dream up ever more expensive drugs, which represent incremental improvements to treatment plans. Doctors MUST prescribe these drugs; isn’t everyeone entitled to the best available treatment? Drug companies set their own prices, and are protected by IP law against competition. And now…Congress decides that States must pay whatever the drug companies ask…
    It is a giant giveaway to drug companies.
    It all boils down to resource usage. Who is doing the efficacy studies that decide WHERE $25,000 should go, to do the most good?
    Nobody.
    Universal health care plans in other countries do this all the time.

  • David Adams

    But what earthly reason is there for prohibiting the government from using its clout as a massive consumer to negotiate for lower prices?
    Well, when the government does it, it’s price-fixing. The marginal cost of producing drugs after they’ve been developed is tiny. So the drug companies have a choice: make less money than we’d like in this government monopsony or make none at all in that market. They choose the former and raise prices elsewhere.
    That’s not necessarily wrong, but it might be bad policy. At least, there are better ways to address the problem. I don’t blame the states for trying, though. They are saddled with federal rules on what they must provide and yet federal policy is the biggest part of the problem.
    First, drug patent rules are necessary, but they go on too long and allow too much leeway to the drug companies in begging for extensions. Second, the FDA complicity in timing OTC transitions with patent expirations (the right time to maximize drug company profits) is disgusting.
    But most importantly, doctors and patients have gotten used to just defaulting to the most expensive, newest drugs. Part of that is due to drug company ads, but the big cause are insurance plans that remove cost as a factor for the patient in making these decisions. If every drug costs the same to me via my copay, why wouldn’t I choose the newest, best one? If the newest, best drug is 10% more effective but costs 10 times more, what do I care? I want the 10% more effectiveness. That cost gets passed along to other policyholders, who only know that their premiums are skyrocketing and they want to get everything out of their plans they can.
    I think reintroducing proportional direct cost to the consumer is essential in controlling health care costs across the board. My own personal experience tells me this is true, as now that I have a nice new drug benefit with my insurance plan this year, I’m stocking up on all the nice-to-have comfort drugs I was never willing to spend the money on before. I don’t really need them, and they cost $80/month before the benefit. But now I pay a fourth of that. From my personal perspective it’s a no brainer. I’m screwing everyone else on my employer’s plan and contributing to our 30% year-over-year increase in expenses last January I’m sure.

  • Ab_Normal

    I know the plural of “anecdote” is not “data”, but here goes anyway. I was talking to a friend about his medical costs; he has a variety of allergy problems, and the insurance company will only pay for the generic versions of the drugs. They don’t work as well for him as the drugs that are still under patent, but he has to get a signed note from his doctor and approval from the insurance company just to PURCHASE the drugs that work for him using his insurance plan.
    All of the insurance plans I’ve had lately (and my company changes providers every six months like clockwork, so I’ve had a lot) have a small co-pay for drugs from their formulary, offset by huge costs for drugs not on the formulary. Some have had two tier systems, some three; but always there’s the penalty for having the “wrong” drug prescribed. It’s an utter pain and one of the reasons why I don’t go to the doctor, even when I need it.

  • none

    a drug for this a drug for that…..maybe we just take too many…..
    As for health care costs. I have what is called catistrophic health care coverage. I am self insured for the first $10,000 and then covered at 20/80. I go to the doctor I want to go to. I pay for the medicine I decide is necessary (with doctor’s advice) and negotiate with all the doctors I visit. It is funny how a doctor will cut his fee an average of 67%. when I tell them I am not insured but will pay cash today for sevices rendered today. I have taken control of MY health care dollars. Not concerned with what the government can get for me. I figure that i’ve saved close to $100,000 in the 18 years that I’ve taken control of the dollars.

  • none

    by the way….
    “…Kostanecki said Michigan saved about $40 million in drug costs through the program in 2003…”
    Michigan, with a population of just uder 10 million people saved $4 per person….WOW!!!
    I wonder how much those savings cost
    population source
    http://www.npg.org/states/mi.htm

  • Buhallin

    Maybe we should consider this a good thing… Can you imagine what it would be like if the government COULD negotiate?
    Pharma: Well, this was expensive to produce, and your subsidies only covered 90% of the research cost… I couldn’t accept less than $2 a pill.
    Gov’t: Hrm. I’m sorry, but that’s just not acceptable.
    Pharma: Really? I thought it was fair…
    Gov’t: No, it’s not. I couldn’t possibly pay less than $6 a pill.
    Pharma: Excuse me?
    Gov’t: All right, then, $8.
    Pharma: Uhm… Are you on crack?
    Gov’t: You people are just impossible to deal with… $10 a pill, and that’s my final offer!
    Pharma: Yeah, well then… I guess $10 a pill is fine.
    Let’s face it, though – the system’s broke. Plenty of people getting rich off it – pharma, insurance… Just not us. Capitalism was never meant to support must-haves like medical services.

  • Buhallin

    “Michigan, with a population of just uder 10 million people saved $4 per person….WOW!!!”
    Per capita, yes.
    How much is it per person on the plan? I doubt all 10 million are getting the same level of benefits.
    Even if you stay looking at per-capita, the US currently has nearly 300 million people. That makes about $1.2 billion. That’s a lot of money to me.
    The $4 above is also for a relatively small negotiating base. Given that the entire basis of this is that larger groups grant more negotiating power, that per-capita savings should be considerably higher, no? If we assume that increasing the size of the stick by a factor of 30 can increase the savings by merely a factor of, say, 3, that’s three billion dollars in savings.

  • Karen Underwood

    My husband brought me a copy of the Jan. 21 AARP magazine last night. I flipped through and was astounded to find–in the same issue–an article “clarifying” what the new Medicare regulations meant to ordinary seniors–and….
    http://www.aarpmagazine.org/travel/Articles/a2004-01-21-mag-mexico.html
    an article all about the benefits of retiring to *Mexico.* How inexpensive the real estate was. The great prices available for dining out, entertainment, household help..and, well…*health insurance.*
    Levy is also keen on Mexican health care, which, as we find, is a popular topic among expats. Though U.S. citizens living in Mexico are not covered by Medicare for doctors’ visits and medical services (unless they travel back to the U.S.), the national insurance program is available to foreigners and costs about $300 a year. There is private insurance as well, at prices considerably cheaper than in the U.S., though costs have been rising….Levy says Americans she knows, many on modest incomes, pay for medical expenses out of pocket, because fees and lab costs are so reasonable. They’ll use insurance only for major procedures. “I’ve had back surgery and my gall bladder out, and the care was excellent,” she says. Virtually all drugs except controlled substances are available without prescriptions. “I pay $40 an office visit,” Levy says. “And did I mention how nice it is to sit and really talk to a doctor?”
    I am officially disgusted.

  • mark

    hey mom I know that you’re on your death bed but I really got great news…i just saved twelve dollars on your medicine.

  • halle

    David Adams – I’m pretty sure price fixing when applies to the sellers’ end of the deal, not the buyers. The sellers don’t have to sell to the buyers, and there’s no suggestion here that MI and VT could compel drug co’s to sell at whatever price they set. Price fixing is an anti-competitive practice forbidden under the anti-trust laws. You’ll have to do a better job of explaining why you think negotiating over bulk purchase price is “price fixing”. So far, just an accusatory label with no theory or facts to back it up.


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