Press Release

Negotiating Prices with Drug Companies Could Save Medicare $30 Billion

March 06, 2007

Contact: Karen Conner, (202) 293-5380 x117Mail_Outline

March 7, 2007

Negotiating Prices with Drug Companies Could Save Medicare $30 Billion

For Immediate Release: March 7, 2007

Contact: Lynn Erskine, 202-293-5380 x115

Washington, DC: A new report by the Center for Economic and Policy Research examines the reasons Medicare Part D is costing less than previously projected and details how the government can reduce its annual costs by $30 billion.

The paper, Celebrating Pork: The Dubious Success of the Medicare Drug Benefit, by economist Dean Baker, shows that lower than projected costs are due to a slowdown in the rate of growth in drug prices that preceded the introduction of the benefit and fewer beneficiaries enrolling in the program.  

"Medicare Part D cost projections have been revised downward because prescription drug costs are rising less rapidly than originally projected – mainly due to stagnation in the drug development process," said Baker. "In addition, fewer people are expected to enroll in the program. These don't sound like reasons to celebrate."

The paper also makes cost-savings recommendations such as allowing Medicare to negotiate directly with drug companies. Currently, insurance companies operating within the Medicare system are paying close to 70 percent more for drugs than the Veterans Administration or countries that negotiate drug prices directly with the pharmaceutical industry. According to the report, if the program were designed to enable Medicare to negotiate prices directly with drug companies — and offer a benefit as an add-on to the existing Medicare program — it could save the government and beneficiaries more than $30 billion a year.

"Congress created a program that is unnecessarily costly," said Baker. "First, it prohibited Medicare from offering its own drug benefit as an add-on to the standard Medicare program, requiring that beneficiaries receive the benefit through private insurers. Second, Congress explicitly prohibited Medicare from using the collective buying power of nearly 40 million beneficiaries to force down drug prices."

The report also notes the $30 billion in excess costs is much greater than the amount of money involved in major public debates over issues such as subsidized student loans and the State Children's Health Insurance Program (SCHIP). For example, the House recently passed a bill that reduced the interest rate charged on some government-guaranteed student loans and phased in the reduction of the interest rate over 5 years because it was believed that the government did not have the approximately $2 billion a year to pay for the lower interest rates immediately. Also, President Bush has proposed a funding level for the extension of the State Children’s Health Insurance Program (SCHIP) that averages $2.7 billion less each year than the level that governors say is necessary to meet their coverage targets.  

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