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From the CQ Newsroom: Baucus Proposes Allowing, Not Requiring, Medicare Drug Price Negotiation

By Drew Armstrong, CQ Staff

January 11, 2007 -- In front of experts from government and academia, Senate Finance Chairman Max Baucus said he would move away from House Democrats' plan to require the government to negotiate Medicare drug prices once the bill reached the Senate.

In a preview of how action in the Senate might unfold, Baucus, D-Mont., said at a Senate Finance Committee hearing that he would like to change the language in the current House bill (HR 4) that would "require" the government to negotiate drug prices. Instead, Baucus said he would simply remove the current prohibition on negotiations from existing law (PL 108-173).

That would be a step back from what House Democrats had been asking for, and give the administration far more leeway in deciding how to proceed.

Senators questioned whether the government would be able to achieve lower prices than those obtained by the private plans, which currently negotiate their own prices with drug makers and wholesalers.

A panel of witnesses cautioned the senators not to copy the Veterans Administration system as they attempt to devise a system for the government to negotiate Medicare drug prices.

"We can't kill the goose that lays the golden eggs, here," said Chairman Max Baucus, D-Mont.

The panel roundly rejected the idea that the government would want to copy the Department of Veterans Affairs (VA) system, which studies have shown achieve much lower prices than Medicare's private plans.

To nods from other panel members, Richard Frank a, health economist from Harvard University, explained that if the VA prices were used as a benchmark for Medicare, drug makers would likely raise VA prices for all drugs in order to preserve a higher benchmark.

The panel also agreed that parts of the Medicare drug benefit were working well, especially in cases where there were multiple drugs with similar purposes that plans could force to compete on price.

"The way you get low prices in the pharmaceutical market is to exclude drugs," said Fiona M. Scott Morton, a Yale economics professor. "You identify a few therapeutic substitutes and you hold an auction."

But in the case of single-source drugs still under patent protection, members of the panel said, private plans were having less success negotiating low prices.

"Competition only keeps prices down when there are competitors," said Frank.

Sens. Ron Wyden, D-Ore., and Olympia J. Snowe, R-Maine, have sponsored a bill (S 250) in the Senate to give the government more authority in negotiating prices for such single-source drugs.

Unlike the House bill, which requires the government to negotiate prices for all drugs, the Wyden bill would require price negotiations only in cases of unique drugs without competitors, or when the drug was developed with substantial government funding.

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