Ex-rep. is still costing taxpayers billions in prescription fees

During his first State of the Union address, President Trump pledged to reduce the cost of prescription drugs.

While some might think only pharmaceutical companies can reduce prescription drug costs, the president and Congress have the power to significantly and immediately reduce the cost American taxpayers pay for the medicines purchased by the government for Medicare beneficiaries.

{mosads}If the president and Congress are serious about reducing drug prices for the American taxpayer, they need to empower the federal government to leverage its considerable purchasing power in negotiating both Medicare Part D drug prices and which drugs are covered under the benefit plan.

American taxpayers fund Medicare Part D, the prescription drug benefit portion of Medicare, through their taxes. In 2016, there were 41 million beneficiaries enrolled in Medicare Part D plans, and the Congressional Budget Office estimated Part D benefits cost $95 billion that year.

According to the Centers for Medicaid and Medicaid Service’s National Health Expenditures report, prescription drug spending totaled $328.6 billion. Medicare not only purchases a lot of prescription drugs, it is a major portion of all the prescription drugs purchased.

One would naturally think in a free-market economy that this level of purchasing power would imbue the federal government with significant negotiating power on behalf of the American taxpayer, but it doesn’t. Why not?

The pharmaceutical industry successfully circumvented the free market by lobbying to limit the government’s ability to leverage its significant buying power to negotiate lower drug prices on the prescription drugs it purchases as part of Medicare Part D.

Within the Social Security law, the “noninterference clause” prevents the government and specifically, the secretary of Health and Human Services, from negotiating drug prices. Additionally, the clause restricts the secretary from determining what drugs are included in the benefit plan or from instituting set prices for the drugs. 

According to the Congressional Budget Office, the clause costs the American taxpayer $11 billion a year — $220 million per word, per year. Over 10 years, that $11 billion adds up to an additional $110 billion that the American taxpayer is paying in prescription drug costs thanks to our Congress and president.

Former Rep. Billy Tauzin (R,D-La.) and the Pharmaceutical Research and Manufacturers of America championed the “non-interference clause” being added to the Social Security law. According to 60 Minutes, Tauzin was responsible for successfully shepherding through Congress the bill limiting the government’s ability to bargain for better drug prices.

This was quite a “win” for the pharmaceutical industry and a loss for the American taxpayer. What happened to Tauzin? Surprise, surprise, he retired from Congress sometime after securing the favorable restriction and accepted a position as president of a trade association where he received $2 million a year.

Which trade association is paying him $2 million a year? I know you will find this shocking: the Pharmaceutical Research and Manufacturers of America.

While still in the Senate and during his first presidential election campaign, former President Barack Obama railed against the government’s limited ability to leverage its massive purchasing power to negotiate more competitive prescription drug prices on behalf of Medicare Part D beneficiaries.

Yet, the Pharmaceutical Research and Manufacturers of America committed to spending $150 million on advertising to promote the healthcare bill that would come to be known as ObamaCare. While the pharmaceutical manufacturers spent generously to promote the bill, the president pushed for and eventually signed into law the Affordable Care Act (ACA), a bill that did not remove the non-interference clause language.  

Attempts to remove the language from the Social Security law continued after passage of the ACA. Rep. Peter Welch (D-Vt.) tried to remove the restriction without success. During his failed effort, the Pharmaceutical Research and Manufacturers of America spent nearly $20 million lobbying Congress, while pharmaceutical manufacturers spent more than $130 million on lobbying.

Do you think some of their lobbying was focused on ensuring that the American taxpayer continued to pay tens of billions of dollars more for drugs than if Medicare had the right to negotiate better prices? The nine most aggressive pharmaceutical companies alone spent more than $67 million lobbying — I bet they sell some drugs to Medicare.

These nine multinationals alone comprised more than 50 percent of the lobbying dollars spent by pharmaceutical manufacturers to ensure the language remained intact.

What would be the return on investment? Spend $67 million on lobbying and in return, Medicare spends an estimated $11 billion more annually on pharmaceuticals than they otherwise would without the language. Now that’s a good return on investment — at the American taxpayer’s expense. 

Significant differences in the prices paid for medications used by Medicare and the Veterans Administration further illuminate why the pharmaceutical industry would spend hundreds of millions on lobbying to preserve the non-interference clause.

The Veterans Administration doesn’t have prohibitions on negotiating prices or what drugs are offered.

VA health economist Austin Frakt estimated that the VA pays 40-percent less for its drugs than Medicare. While some may argue that the prohibitions against negotiating prices and determining which drugs are covered is not the cause for the difference in prices paid by the VA and Medicare, why did the pharmaceutical industry insert it into the Social Security law?

Second, if that were true, what would it say about the merits of the free market if this type of market interference had no impact on pricing? Finally, if this restriction was inconsequential, would they be willing to take this restriction out?

To add insult to injury, according to a 2016 poll by the Kaiser Family Foundation, 82 percent of Americans favor allowing the federal government to negotiate drug prices with pharmaceutical companies to secure better pricing for Medicare beneficiaries.

It is time for President Trump to make good on his promise to lower prescription drug prices and for Congress to respect the wishes of the people they were elected to represent. It is time to remove the non-interference clause from the Social Security law.

Chris Macke is the founder of Solutionomics, an economic think tank. He has advised the U.S. Federal Reserve by providing market updates and implications of monetary policy changes on asset valuations and market distortions, and he’s a contributor to the Fed Beige Book.