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Medicare Drug Negotiation Could Save Billions, Study Says

By Michael Teitelbaum, CQ Staff

April 4, 2007 – A new study by two left-leaning groups says the government could save as much as $30 billion a year if Medicare were allowed to negotiate drug prices, though the Congressional Budget Office issued a letter earlier this year saying savings would be nominal.

The study, released Wednesday by Campaign for America's Future (CAF) and the Center for Economic and Policy Research (CEPR), noted that about $10 billion of the savings would come in the form of cheaper prices for prescription drugs, while roughly another $20 billion would be a result of Medicare being able to negotiate for the same prices the Veterans Affairs Department already receives because of its bulk purchasing power.

The report, completed by the Institute for America's Future, the research arm of CAF, cited a Families USA study that assumed the government is covering two-thirds of all prescription drug spending, with seniors taking care of the other third. Based on those numbers, the total gross prescription drug spending for Medicare enrollees will be approximately $78 billion in 2008. The report also said $5 billion in excess administrative costs could be cut if seniors were able to get their benefits directly from Medicare, instead of picking among private company plans offering the prescription drug benefit.

The Institute's report noted that the savings could go toward eliminating the " doughnut hole" in Part D coverage or toward funding SCHIP.

CBO challenged the premise that the House bill would drive down drug prices. In a Jan. 10 letter to Energy and Commerce Chairman John D. Dingell, D-Mich., the office said that bill, "would have a negligible effect on federal spending."

Senate Finance Chairman Max Baucus, D-Mont., is expected to introduce and try to mark up Medicare drug price negotiation legislation after the April recess. It is possible his bill could scale back House-passed legislation (HR 4) simply by removing an existing negotiations prohibition from the 2003 Medicare overhaul law but not adding a requirement as the House would that the secretary engage in such talks.

Senate Finance member Debbie Stabenow, D-Mich., said she "does not think the votes are there in committee to approve the House bill," and that it would be a challenge to get it out of committee or passed on the floor. "We may get less than what we would like. But it would be a step in the right direction." She acknowledged that if the bill does not require the secretary to engage in drug price negotiations, "it is very clear there would be floor amendments."

She also noted that the committee's ranking Republican, Charles E. Grassley of Iowa, opposes the legislation and would filibuster it, and a further challenge could be the need to override a likely presidential veto.

The House bill, passed Jan. 12, would prohibit the Health and Human Services secretary from establishing a formulary, or restrictive list of covered drugs, which would leave him without the bargaining leverage to freeze a particular drug out of the Medicare benefit.

CEPR co-director Dean Baker said CBO assumes HHS would be ineffective in getting lower prices and said an aggressive secretary could get lower prices. Stabenow agreed. "If the industry knows the bill is not going to help lower drug prices, then why not let it pass?" she asked. "The behavior does not match the rhetoric."

The two groups also announced that a new grassroots campaign by a coalition of progressive advocacy groups called Change America Now is urging members of the Senate to back legislation that calls for Medicare prescription drug price negotiation.

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