It’s no secret that, four years ago, President Obama cut a deal with the pharmaceutical industry. He promised that so long as the drug companies did not block health reform, federal law would continue to prohibit Medicare from negotiating drug prices. Instead, the pharmaceutical industry would get 30 million new customers and remain free to set drug prices for Americans.  This single policy will cost Medicare and U.S. tax payers hundreds of billions of dollars over the next ten years.

If Congress wants to contain long-term Medicare spending and keep health care affordable in America, lawmakers should start with the low-hanging fruit: the excessive prices Medicare and our citizens pay for drugs.

Medicare easily pays between 150 and 300 percent of the average cost of prescription drugs in the other wealthy nations. Recently released data from the International Federation of Health Plans make the point. A monthly supply of Lipitor (a common cholesterol medication) costs about $100 in the U.S.; the same drug costs about $6 in New Zealand and $48 in France.  Nasonex (commonly prescribed for nasal infections) costs Medicare about $108 for a monthly supply; the same drug costs France $17 and Canada $29.  At best, the United States subsidizes the prescription costs of all other wealthy nations; at worst, we are simply dupes.

Price Increases Are Continuing

Moreover, the prices of brand name and specialty drugs in the U.S. are increasing substantially every year. Generous patent protections, effective oligopoly power and the lack of price regulation in the drug market grant the drug industry the privilege of inflating drug prices without any legal or market constraints. A 2009 AARP study reports that the cost of brand-name drugs rose much faster than the Consumer Price Index between 2002 and 2009. A Credit Suisse study reveals that in the 12 months ending Sept. 30, 2009, list prices for the eight largest drug companies rose an average of 8.7 percent.

These huge annual drug price increases have not abated during or since the Great Recession. In 2010, Barclay’s reported an average 6.9 percent increase in the 130 top-selling drugs it studied. Prices of popular brand-name drugs increased 12.5 percent in 2012, more than seven times the overall rate of inflation for consumer goods (1.7 percent), according to data compiled by Express Scripts.

To maximize profits, drug companies have abused the nation’s trust, continually broken the rules, and set excessive prices for Medicare and Medicaid. Between 1991 and July 2012, 20-plus drug companies have settled 269 state and federal allegations of wrongdoing, half of which involved inflating drug charges to Medicare and Medicaid. All in, they have paid out almost $30 billion in penalties.

The sheer number of recent drug company settlements — 74 of them, with financial penalties totaling $10.2 billion, between November 2010 and July 2012 — reflects an industry that is ready, willing and able to bilk taxpayers at every turn and holds itself above the law. Financial penalties are no deterrent, a trivial price when compared to their soaring profits.

In the last 10 years, the largest 11 drug companies delivered $711 billion in profits, resulting in significant part from new business attributable to the advent of the Medicare drug benefit in 2006. Between 2005 and 2012, these companies have seen an almost 50 percent increase in profits, from $57.1 billion to $83.9 billion. Congress needs to step in.

Policy Changes Could Bring Big Savings For Taxpayers

If Congress permitted the federal government to negotiate drug prices as every other wealthy nation does, U.S. taxpayers could save hundreds of billions of dollars. In every other wealthy nation, the government limits drug company prices to between 35 and 70 percent of U.S. prices. Reining in brand-name and specialty drug prices in Medicare alone would strengthen the program while protecting older and disabled Americans. If those prices were negotiated down to those paid in Denmark, for example, Medicare would save $541.3 billion over 10 years, according to Dean Baker, co-director of the Center on Economic and Policy Research


Source: Dean Baker, Center on Economic and Policy Research

In a recent report on Medicare spending, the Kaiser Family Foundation looked at ways Congress could generate substantial savings by reducing the amount Medicare pays for drugs. These solutions warrant strong congressional support. Simply restoring an established drug-discount program that Congress ended when it enacted the Medicare drug benefit would generate about $123 billion in savings over 10 years. These discounts are drug rebates for people enrolled in Medicare and Medicaid, also known as “dual-eligibles,” and were supported by President Obama in his State of the Union message and his proposed 2014 budget.

With Congress committed to curbing wasteful spending, our representatives should be focused on ending drug-company price setting in America. Like every other wealthy nation, the United States can negotiate prices for its citizenry without hampering vital drug research or impeding new drugs from going to market. Drug research and marketing costs do not require Americans to pay grossly inflated prices, as the pharmaceutical industry often argues. There is no data to back up their claims that patients would suffer without high prices; to the contrary, there is every reason to believe drug makers are crying wolf on this issue. At any rate, even cutting-edge pharmaceutical research is of little value to us if brand-name and specialty drugs are increasingly unaffordable to vast numbers of Americans who need them.

Americans can no longer live by drug company rules. Our nation cannot afford what amounts to hundreds of billions of dollars in corporate welfare to Big Pharma in the form of unfettered pricing power guaranteed by law to produce super-sized profits. The rate of growth in health care spending is already unsustainable and untethered from the rules that would support a healthy marketplace that serves buyers, sellers and the public interest. Negotiated drug prices are a common-sense way to protect our economy, along with the lives of countless Americans for whom vital drugs and good health are simply unaffordable.