Surprise! PhRMA chief doesn't want Medicare negotiating drug prices


I'll slip this in on the weekend because it's not really news and it's not at all surprising. PhRMA CEO Billy Tauzin is opposed to having the feds negotiate Medicare drug prices. The Medicare drug legislation he fought so hard to get passed while a Çongressman- even being singled out for praise by President Bush - bans such price negotiations. It closes the door on Medicare being able to wield its massive purchasing power in a way that could help health care consumers.

But that's not the way good old boy Billy sees it.

From the Kaiser Daily Health Policy Report last week:

Allowing Medicare to negotiate prescription drug prices on behalf of beneficiaries could reduce the number of drugs the program offers and result in higher costs for beneficiaries, Pharmaceutical Research and Manufacturers of America President and CEO Billy Tauzin said Wednesday, CQ HealthBeat reports. According to Tauzin, Medicare now offers access to thousands of drugs because the program relies on private-sector competition. Tauzin, speaking at a media roundtable, said, "When you put the government in the process you freeze out the private sector."

HHS Secretary-designate and former Senate Majority Leader Tom Daschle (D-S.D.) last week in testimony before the Senate Health, Education, Labor and Pensions Committee said the idea of allowing the secretary to negotiate drug prices "ought to be evaluated and looked at." Supporters of the idea have said it could save taxpayers billions of dollars and lower drug prices for all U.S. residents

It'll be fun to watch Billy function without his buddy in the White House.

By the way, if you never saw the 60 Minutes profile of Tauzin's role in the passage of the Medicare drug legislation, give it a look someday.


(Quoted from my blog at
Of all the players in healthcare, the drug manufacturers have maintained the most market power over the years. The doctors gave up their ability to regulate their own prices a long time ago, and shame on the AMA for allowing that to happen. Hospitals also lost the power to set their own prices, and Medicare and insurance companies regulate how much they can charge for a hospitalization based on the length of stay and the complexity of the diagnosis.

The rules on how doctors and hospitals get paid are getting more complex with each passing year. There's a whole movement to tie our fees to how well we do our jobs--the word for this is "quality," where there are rewards and penalties for meeting defined goals of clinical care.

Now let us evaluate the situation with the drug companies. They retain the ability to set their own prices, and they have protections from the federal government to prevent reimportation (which might also destabilize high prices in the US). The only regulation of drug costs I can see occurs in my office, where the really expensive drugs, the ones that cost over $1,000 a month, come with reams of paperwork to fill out. The prior authorizations. Now I have to have extra staff to help move all that paper through the system, and that costs money. But once the drug is authorized, the insurance company pays every dollar demanded by the drug company.

In fact, the pool of dollars to purchase these overpriced drugs expanded recently with the creation of Medicare Part D. Now I think it's great that older Americans get a federal program to help them buy drugs, but why doesn't that program regulate the costs of those drugs, as it regulates the cost of every other component of medical care, down to hospice costs?

So the pharmaceutical industry essentially argues that they need their full market prices, or else they will have little incentive to innovate and come up with new drugs. This argument fails for several reasons. The pace of innovation has slowed considerably over the past few years, and the rate of new drug approvals is down across the board. Also, if you look at total costs of drug development, you have to account for the fact that a lot of new drugs are "me-too" drugs, not actually innovative, but just designed to cash in on a currently successful drug's popularity by making small changes to the formula.

Perhaps more important is the issue that much of the real innovation is subsidized by the federal government already, in the form of NIH research grants to university researchers. When the university innovations reach the point of feasibility as a new drug, the intellectual property can then be purchased by the drug companies, who then turn it into a drug. In this way, drug companies are more like banks or hedge funds, and less like the innovation factories they claim to be.

Large drug companies can also purchase smaller, more innovative drug companies after the riskiest phase of drug development has taken place in the smaller company. Again, this makes the innovation argument moot, since the companies yelling the loudest about Medicare price regulation are not the ones actually creating the most drug innovation.

Imagine if there was a "quality" directive in place for the drug companies. Lack of efficacy, or perhaps serious side effects, in a given patient, could be punished by withholding of payment for a drug. Right now, the drug companies have to pay for serious side effects in class-action lawsuits, but this only occurs way after the fact, and not as part and parcel of the reimbursement system.

Perhaps you can clarify a few things based on above.

I am unable to determine whether government negotiation will have untoward effects on overall pricing. Keeping in mind it is from the Heritage Foundation, and they base some of their conclusions on PhRMA data, below link will take you to recent policy paper.

I have seen in several places, congressional paper as well (? CBO estimate), that based on current pricing structure (reference pricing, rebates, etc), that any Fed negotiation will result in one big price shift to private side and overall increase in costs. Again, a biased perspective in this paper, but more than one time, in less skewed analyses, I have read the same.

Gov't negotiation not a panacea, although on its face, seems like it might be.

Can you shed any light?

Apparently, when he was in Congress, Mr Tauzin had no problem with Medicare fixing what it pays physicians (even though how it does so is a major cause of the collapse of primary care).

See my most recent post on this subject on Health Care Renewal, with links backward:

In the political payback deal of the century, Congress had created the Medicare Part D, prescription drug benefit.

The law guaranteed premium pricing for pharmaceuticals, by prohitibiting Medicare from negotiating drug prices, and it provided hundreds of billions of dollars in U.S. taxpayer subsidies to pay for these premium drug costs.

The specter of "rationing" is raised, but Medicare is so huge that the pharmaceutical industry would not walk away from this market, anymore than it walked away from the Canadian or European markets, if it was allowed to negotiate drug prices.

Foreign governments negotiate with the pharmaceutical companies on drug prices and yet the pharmaceutical companies still find it profitable to sell drugs outside of the United States at discounts of 30 - 50 percent, compared with U.S. drug prices.

Drug makers can still make adequate profits by selling drugs at steep discounts within the United States. Even defense contractors and space-agency contractors have to negotiate pricing with the government.

Strangely, industries have survived government negotiations for more than two centuries, while the government has been able to obtain the goods and services it requires.

Give Medicare the ability to negotiate drug prices, and drug prices for Americans will go down, while those for the rest of the world will eventually go up, and there will be a more equitable sharing in the global costs of pharmaceutical research and markting.

About this Entry

This page contains a single entry by Gary Schwitzer published on January 18, 2009 11:13 AM.

Gaping hole in med school conflict of interest policies was the previous entry in this blog.

Patients unaware of docs' conflicts of interest is the next entry in this blog.

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