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Argument: Public insurer can best negotiate down drug and care prices

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Supporting quotations

Jacob Hacker. "The case for public plan". The Institute for America's Future: "The government has another advantage when it comes to holding down costs: It is capable of using its concentrated purchasing power to pioneer new payment methods that bring down costs. Medicare’s improving cost-control performance over the last quarter century tracks closely the introduction of innovative changes in hospital payment using a prospective payment system in 1983 (a system by which hospitals are paid a pre-determined rate for each Medicare admission based on the patient’s diagnosis at the time of admission) and the creation of a resource-based physician fee schedule (a scale of national uniform relative values for all physicians’ services) and volume controls on overall Medicare physician spending in the 1990s.21 While Medicare’s methods of paying providers clearly require improvement, especially with regard to physician payment, the program’s record is still notably superior to that of private insurance.

Perhaps the simplest way to look at Medicare’s bargaining power is to compare Medicare rates with those paid by private insurance. According to the Medicare Payment Advisory Commission (MedPAC), Medicare’s rates for physicians are 81 percent of private rates—a clear sign of superior negotiating leverage. For hospitals, MedPAC estimates that Medicare pays around three-quarters of what private payers do.22 These differentials have been relatively stable, and as noted below, they have not had the negative effect on provider participation or revenues that critics often suggest. Indeed, for-profit hospitals made record profits in 2007,23 and the number of physicians billing Medicare is actually increasing faster than enrollment in Part B medical insurance.24 Another source of comparative insight is the relative costs of the public Medicare plan and private plans that contract with the program through Medicare Advantage. The gap between the administrative costs of the public Medicare plan (2 percent) and those of private plans (11 percent) has been mentioned. But the experience of private plans within Medicare offers a more general portrait of the (limited) ability of private plans to restrain costs.

As is well known, Medicare Advantage plans are substantially overpaid relative to what it would have cost to provide coverage to the same enrollee in the public Medicare plan—13 percent more on average per person, as calculated by MedPAC and confirmed by the CBO.25 This overpayment reflects two main problems: a method for paying plans that subsidizes their participation in Medicare Advantage and the ability of the plans to attract healthier (and hence less costly) people with Medicare. Both of these problems can and should be addressed—in Medicare and in any new framework for public-private competition. Yet the larger lesson of Medicare Advantage is that private plans do not appear to have strong tools for controlling costs relative to the public Medicare plan. The most tightly regulated HMOs have been shown to perform roughly as efficiently as the public Medicare plan does, but according to MedPAC, most private plans are not as efficient as the public Medicare plan. All but HMOs bid to provide Medicare Part A and Part B benefits for more than the public Medicare plan spends on the same benefits—often much more. Indeed, the fastest-growing category of Medicare Advantage plan, private fee-for-service plans are the least efficient and most costly for Medicare, with their bids for Part A and B benefits fully 108 percent of the public Medicare plan’s costs.26

Were Medicare permitted to bargain directly for drug prices, moreover, there is no question it would receive better deals than currently offered to private payers. The CBO has found that drug prices under four federal programs—including the Veterans Health Administration (VHA) and Medicaid—are on average 49 percent below the average wholesale price of the drugs.27 Another recent study found that the lowest price available for the top 20 drugs prescribed to seniors were 58 percent cheaper under the VHA plan than under Medicare Part D.28 Medicare’s private plans negotiated drug manufacturer rebates of only 8.1 percent in 2007.29

The failure of private insurers to obtain affordable prices is borne out by international comparisons as well. A recent McKinsey study finds that branded drugs in the United States are 60 percent more expensive than in Canada, with its “single payer” provincial insurers, and that the top-selling drugs of leading drug companies are 2.3 times more expensive here than in other rich nations, where public-sector bargaining is prevalent.30"


Reed Abelson. "A Health Plan for All and the Concerns It Raises". New York Times. March 24, 2009: "While the details of a federal insurance plan remain vague, a central question is whether it would function like Medicare — wielding the government’s size and clout to essentially dictate the prices it pays for medical care.

If so, the government’s main advantage over the private sector would be to demand much lower prices from doctors and hospitals than private insurers are able to negotiate. It could then pass those savings along to consumers in much lower premiums than the private plans might be able to offer. Critics say such a system would eventually force private insurers out of business."

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