Let Medicare Negotiate Drug Prices And The Government Can Afford Subsidies

Medicare Negotiates Drug Prices And The Government Can Afford SubsidiesRight in the middle of the sequestration mess seems like a good time to discuss the subsidies that are going to be a major part of the ACA starting next year.  As of 2014, nearly everyone in the US will be required to have health insurance, and all individual health insurance will become guaranteed issue.  There are concerns that premiums in the individual market might increase significantly, but for many families the subsidies enacted by the ACA will help to make coverage more affordable.  The subsidies will be available to families earning up to 400% of the federal poverty level; the premium assistance will be awarded on a sliding scale, with the families on the upper edge of that income threshold receiving the smallest subsidies.

But how much will those subsidies cost the taxpayers?  How will a government that is so cash-strapped that it’s curbing spending on programs like Head Start and special education be able to fund the subsidies called for in the ACA?

Last summer, the CBO estimated that the exchange subsidies will cost $1,017 billion over the next ten years.  Undoubtedly a large sum, but probably necessary in order to make guaranteed issue health insurance affordable for low- and middle-income families.

That sum is partially offset by the CBO’s projections of $515 billion (over the next ten years) in revenue from individual mandate penalties (fines imposed on non-exempt people who opt to go without health insurance starting in 2014), excise tax on “Cadillac” group health insurance policies, and “other budgetary effects” enacted by the healthcare reform law.

That leaves us with $502 billion.  Not an insignificant sum of money even when the government coffers are flush with money, which they are not at the moment (or at least there seems to be very little agreement on where the government should be spending the funds it does have).

And that seems like a perfect segue into a recent Center for Economic and Policy Research report that projects a government savings of up to $541 billion over the next ten years if Medicare could negotiate drug prices with pharmaceutical companies.  Even on the low end, the CEPR reports a savings of at least $230 billion, which would cover half of the funds needed for the health insurance subsidies over the next decade.  But on the high end, the savings from allowing Medicare to negotiate drug pricing (the way it does with other services, and the way other industrialized countries do) would more than offset the funds needed for the health insurance subsidies.

It seems like a no-brainer.  Medicare gets a better deal on meds, and the follow-the-leader effect that Medicare has on healthcare would mean that private health insurance carriers and consumers would also get a better deal on meds.  People would still get the medications they need, and low- and middle-income families would get the subsidies they need in order to afford health insurance, without having the country go through a year of political wrangling in order to secure the necessary funds (I know it’s not as simple as taking money from one spot and assigning it elsewhere, but the overall balance would be better than it is with the current no-negotiation policy in place).  Pharmaceutical company profits might take a bit of a hit, but it’s a hit they can well afford, given that their profits as a percentage of revenues are almost always at least in the mid teens (about three to four times as much as health insurance carriers).

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

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