Opinion : Prescription Drug Reform

The Congress is debating, and is close to passing, a Medicare-prescription drug reform bill. Part 1 of this bill requires the government to negotiate with the drug companies to lower the price of drugs to seniors. This is a very important and much needed law that is a good idea. Unfortunately for seniors, however, this law has a second clause. Another part of the bill would make it illegal for the government to use formularies in Medicare plans. The problem is that formularies are by far the most important tool the government has in pharmaceutical negotiations.

Think how the negotiations would unfold: The Government and the Pharm. reps are sitting at a table deciding drug prices. If say 4 companies make a certain class of drug (assuming similar efficacy profiles) then the government could pit them against each other by saying that only the cheapest will be included in the formulary. This would likely reduce the price to nearly cost, as drugs in competitive classes would be forced to compete. The problem with the current plan however, is that the government will not be able to limit any of the competitors. This will greatly reduce the incentive to compete amongst companies. Even if one company bids a lower price, how will the government make people use that drug? Remember that the government is now paying the bill no matter which drug people choose, so there is little economic incentive to take the cheaper option.

To make matters worse, this will also provide more incentive to Pharmaceutical marketing, as the race will be on to push consumers away from the newly low-price drugs and to make them request the higher price version. If market share is increased successfully (and recent history suggests it will) then the companies will now have even more power in those required negotiations. This just shows me further proof that the pharmaceutical companies are not simply bribing "ahem…lobbying " the republicans….they are bribing everyone.

And by the way, short of a single payer system, the best solution would have to allow both formularies and consumer choice…oh wait, that’s exactly what Medicare D is now…

Disclosure: I own stock in pharmaceutical companies and am currently helping one of them run a clinical trial.