Response to Polly W. on Kulick contra Krugman

by robekulick

Polly W., an expert on health policy,  made this very astute comment on my article “Kulick contra Krugman”:

“Cool blog and good post.  I think there is a lot to be said about the structure of physician payments under Medicare.  It is a huge problem, and we need find ways to be more efficient and drive docs/hospitals toward producing better health outcomes if we want to ever get to a place where these costs can be contained (at least at a level where the government can actually afford to pay market prices — which clearly is not the case right now).

One quick note on pharma — Medicare (as in HHS) can’t negotiate prices with Rx companies. Under Part D, Rx companies negotiate prices with private insurers that are certified to provide the Part D benefit.  This is, in fact, a very similar process used in the private market for non-Medicare plans.  The negotiation power of Medicare is just stronger because of the size of the beneficiary pool and the fact that senior citizens use significantly more Rx meds than the rest of the population.  Granting HHS the authority to negotiate prices under Part D is one of the top concerns of industry in the deficit negotiations.  Right now, the government essentially only foots the bill for Part D–which is why the program, despite its success, is partially responsible for driving the deficit.

The fact that the government can’t mandate prices is in fact why the U.S. is the largest hotbed for biopharmaceutical innovation in the world — so I completely agree with what you are saying in that we should not move toward that kind of strucure.

Hope your program is going well!”

I’m really glad she made this comment, because I thought of addressing this issue when I first wrote the post, but got lazy. But for the sake of clarity I really should have addressed this. Polly is 100% right that under the Medicare D rules, the government cannot force drug companies to cap their prices. However, under the Medicare B rules, for treatments like chemotherapy that are dispensed in Dr.’s offices, Medicare does control the prices they pay for medicine:

As this wikipedia article explains:

Of course, they actually control what they pay the Dr. for the drugs they buy from the drug companies, but this still effects the the pharmaceutical company since it is just an instance of what we call “derived demand” in economics.

Now it is true that if Medicare D worked this way, the attenuation of incentives to invest would be more severe, but even under the current system, I think it is the case that the true cost in terms of innovation is not represented in official statistics on the cost of Medicare.

Also of course, under Medicare, the government does control what it pays Doctors for their services, so  the official cost statistics do not account for negative consequences of fixed prices on the provision of medical services.

Also, and this is where I am really remiss because I was unclear, I was lumping Medicaid in with Medicare for the purposes of the discussion of the consequences of government provision of healthcare. This is important because Medicaid purchasing rules  under 42 U.S.C. § 1396r-8(c)(1)(A), (B) & (C) the government demands that pharmaceutical companies provide it with drugs, like HIV medications, for either (a) a 15.1% discount in the list price of the drug or (b) the lowest price offered to any private purchaser. Furthermore, under this rule, price increases cannot exceed the rate of inflation after the drug has been introduced.

So now my argument is on much firmer footing. Thanks Polly! I hope you keep reading, posting, and making such insightful comments! Also, I also still owe Kevin a response to his post, but I wanted to address this one first since its actually been weighing on me since I wrote it.