Advocates of cheaper drug prices like to talk about federal "negotiation" of prices with pharmaceutical companies. And when they do, they almost always point to the Department of Veterans Affairs, which they say has used its size to "bargain" for better deals on prices for years. Why, they want to know, can't Medicare do the same thing?
"The Veterans Affairs system ... negotiates lower prescription drug prices," Sen. Dianne Feinstein (D-Calif.) said last year. "Why should we prevent the secretary of [Health and Human Services] from doing the same on behalf of our 41 million Medicare recipients?"
But Feinstein and her colleagues know full well that although "negotiation" has a nice ring to it, that's not really what is going on. What's actually happening is something that does not sound quite as appealing: price controls.
Under the 1992 Veterans Health Care Act, two price constraints are imposed upon pharmaceutical manufacturers in dealing with the VA: There is a minimum 24% discount off the "non-federal average manufacturer price." And there also is the Federal Supply Schedule, or FSS, requirement that the pharmaceutical producers sell drugs to the VA at the "best price" offered to private-sector buyers.
The VA is entitled under the law to receive either the minimum 24% discounted price or the "best price," whichever is lower. These "best prices" are not just for the VA; many healthcare programs receiving federal funding also are entitled to them. That is how the federal government, state Medicaid programs and others receive the benefits of private-sector negotiations without actually having to undertake negotiations themselves.
And if drug companies refuse to play by these rules? They then would be precluded from selling any of their products to the VA and other healthcare programs operating under the FSS system, and in all likelihood to the Medicaid system as well, thus shutting them out of a market accounting for roughly 10% to 15% of their sales.
Now consider the economics of drug development. Despite many casual assertions about "huge profits," the truth is that pharmaceutical companies face enormous research-and-development costs -- about $800 million per drug -- as well as increasing regulatory burdens, a growing squeeze on patent protections, a 15-year period of development uncertainty and huge potential litigation risks.
