Nancy Pelosi and many other Congressional Democrats want the federal government to negotiate drug prices for Medicare enrollees. They think this will lead to lower prices. But as Alan Enthoven and Kyna Fong explain in the latest NCPA Brief Analysis, drug prices for seniors may not go down. They may even go up.
The key to tough negotiations is the willingness and ability to walk away from the table with no deal. Clearly the VA system does this. Veterans have access to only one-fourth the number of drugs that Medicare covers. But the wrath of senior voters and the lobbying power of pharmaceutical companies may make it impossible for Medicare to emulate the VA's approach.
A drug company with a (patent rights) monopoly has an incentive to price discriminate among private buyers – charging lower prices to some and higher prices to others. But if the government negotiates a single price for everyone, the resulting price is likely to be higher than lowest prices paid by private buyers.
Under one common tactic, government links the price it will pay to the prices paid by other buyers – for example, by insisting on paying the lowest price paid by any buyer. But instead of lowering the price paid by government, such a strategy may instead lead to higher prices charged to private buyers. This appears to be what happened in Medicaid.