–Medicare drug negotiation: How can something sound so good and be so wrong?

Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

Mitchell’s laws:
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The more federal budgets are cut and taxes increased, the weaker an economy becomes. .
Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
●Austerity is the government’s method for widening
the gap between rich and poor.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Everything in economics devolves to motive,
and the motive is the Gap.

An excellent blog called the National Memo, recently published this post by David Lazarus: Consumer Confidential: Costco-Visa Deal Shows Why Medicare Should Negotiate Drug Prices.

Here are some excerpts:

Costco’s deal to replace American Express with Visa as its exclusive credit-card company highlights an economic principle that should surprise no one.

Consumers benefit when a business uses its market power to negotiate lower prices and passes along the savings to customers.

Conservatives have championed such market forces for decades, arguing that if government regulators just got out of the way of businesses, consumers would be the big winners.

That is, unless we’re talking about drug prices.

Medicare, the federal healthcare program, is prohibited by law from haggling with makers of prescription drugs over the prices paid by its 54 million beneficiaries.

O.K., it may be a bit of a stretch to equate Costco’s shopping for a credit card company with Medicare’s non-negotiation of drug prices.

But the point is that negotiation often achieves lower prices than does failure to negotiate. (Are we allowed to say, “Well, duh” for that revelation?)

The post continued:

That bizarre stipulation was put in place in 2003 by the administration of former President George W. Bush.

Republican lawmakers, backed by the powerful pharmaceutical industry, argued at the time that the private sector was in a better position to ensure fair pricing of prescription meds.

In subsequent years, Republicans have repeatedly beaten back attempts by Democratic lawmakers to lift this prohibition.

Yep, as usual, the Republicans are on the side of big business and against consumers. But ironically, as you shall see, the Republicans are right — sort of.

“Private competition works,” Sen. Charles Grassley, an Iowa Republican and a principal author of the 2003 law.

Surely that had nothing to do with the almost $240,000 Grassley received from pharmaceutical interests in the 2002 election cycle, prior to his leadership role in drafting the Medicare legislation, according to the Center for Responsive Politics.

And it’s probably just a coincidence that no industry spends more lobbying lawmakers than the drug industry.

The reality, of course, is that conservative politicians and their profit-minded business allies have subverted market forces to ensure that Americans pay some of the highest drug prices in the world.

The United States spends almost $1,000 a person annually on prescription meds, according to the Organization for Economic Cooperation and Development.

That’s about twice as much as the likes of Canada, Japan, Germany and France, which permit their state-run insurance plans to negotiate the best possible terms with drug companies.

And yep, as usual, the Republicans rake in big money to take their stands on behalf of big business. Again, “Well, duh.” Nothing new here.

Sen. Harry Reid, the Nevada Democrat who was then the Senate majority leader, had a prudent response to this sentiment.

“The Department of Veterans Affairs is able to negotiate for lower-priced drugs,” he said. “HMOs can negotiate. Wal-Mart can negotiate. Why in the world shouldn’t Medicare be able to do that?”

Yes, why in the world?

Medicaid, the insurance program for low-income people, is allowed to negotiate discounts for members. The Congressional Budget Office estimates that if Medicare had the same bargaining power, it could save $116 billion over 10 years.

That’s serious money, and it’s your money we’re talking about. These are taxpayer dollars at stake.

Sounds good, right?

Ah but, longtime readers of this blog see the clue. Those are not taxpayer dollars we’re talking about. Those are government dollars.

Unlike state and local governments, which need and use taxpayer dollars to pay their bills, the federal government does not use taxpayer dollars for anything. It destroys taxpayer dollars upon receipt, simply because it has no need for them.

The federal government is Monetarily Sovereign, meaning it creates unlimited dollars, ad hoc, by paying bills.

Each time the federal government pays a bill, it sends instructions to the creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account. At the moment the bank complies, and not before, brand new dollars are created.

No taxpayer dollars involved.

Federal bill paying (deficit spending) is the method used by the federal government, to add dollars to the economy and to stimulate the economy. Millions of companies benefit from government payments, and those companies hire workers, who spend money, and the economy grows.

But the National Memo article writer, David Lazarus, seemingly does not understand the differences between Monetary Sovereignty (the federal government) and monetary non-sovereignty (you and me, and businesses, and state and local governments).

He thinks that when the government saves money it benefits taxpayers. But the reality is, when the government spends money it benefits taxpayers and everyone else.

If Medicare were to negotiate drug prices, what would happen? Pharmaceutical companies would make less money. But unlike the Monetarily Sovereign federal government, the monetarily non-sovereign pharmaceutical companies are part of the private economy.

Unlike the federal government, which neither needs nor uses income, private companies need and use their income to hire people, pay salaries, buy goods and services, and generally help stimulate the economy.

The Republicans, bless their souls, are as usual, pro-big money and big business, and anti- little money, but on this one issue, they are right (by accident).

Neither Medicare, nor any other branch of the federal government, should negotiate with private industry . . . not the pharmaceutical companies, not the war supplies companies, not the road-building companies . . . as a money saving exercise.

The federal government cannot run short of dollars, and does not need to save money, and its spending grows the economy.

There may be arguments for the federal government to negotiate for lower prices, the primary one probably being that federal prices conceivably could set prices in the private sector. So, as the argument might go, if the federal government overpays for a road (beneficial to the economy), presumably that could force state and local governments to overpay for roads (bad for state and local taxpayers).

But, in the real world, that sort of crossover doesn’t seem to happen. Medicaid’s negotiations don’t seem to lower Medicare’s prices. What one buyer pays often is quite different from what another pays. That guy sitting next to you on an airplane might have paid half what you paid for a ticket.

Bottom line:
1. State and local taxpayers pay for state and local government spending, but federal taxpayers do not pay for federal spending.
2. Federal spending adds dollars to the private sector, which stimulates the private sector (i.e. stimulates the economy)

Contrary to popular intuition, Medicare should not begin to negotiate with the private sector for drugs. It’s simply a case of something sounding so good and being so wrong.

Rodger Malcolm Mitchell
Monetary Sovereignty

The Ten Steps to Prosperity:

1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Federally funded, free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually. (Refer to this.)
8. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income. (Click here)
9. Federal ownership of all banks (Click here and here)
10. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)

Initiating The Ten Steps sequentially will add dollars to the economy, stimulate the economy, and narrow the income/wealth/power Gap between the rich and the rest.

10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
1. A growing economy requires a growing supply of dollars (GDP=Federal Spending + Non-federal Spending + Net Exports)
2. All deficit spending grows the supply of dollars
3. The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.
4. The limit to non-federal deficit spending is the ability to borrow.

Monetary Sovereignty

Monetary Sovereignty

Vertical gray bars mark recessions.

As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.


14 thoughts on “–Medicare drug negotiation: How can something sound so good and be so wrong?

  1. Two things, Rodger. First, Medicare doesn’t pay the full cost of the drugs. And even with a Part D supplement, the patient pays part of the cost, and that is often substantial, especially after she gets into the “donut hole”. If Medicare were to properly represent its clients, like real insurance companies do, it would prevent the transfer of money from people to corporations. That would probably be a good thing for the economy, especially now when corporations are sitting on so much cash and the people are hurting.

    Second, where were Harry Reid and these Democrats who say they want this change in 2009? Oh, I remember, Harry Reid was majority leader of a FILIBUSTER-PROOF Senate, and the Dems also had a massive majority in the House of Representatives and a Democrat in the White House. They could have had this if they really wanted it.

    Or they could have done even more. They could have told the drug companies, like the government of Canada does, the price at which they will sell the drug. “Anyone else want to negotiate?”


    1. Thanks. You are correct. Medicare pays for in-hospital drugs.

      Private insurance companies pay for most of pharmacy drugs, but some big ones are left out.

      (Please note all you who believe the government is too big and private everything always is better.)

      In Step #2 of the Ten Steps to Prosperity, Medicare would pay for everything.


    2. golfer1john, unfortunately you are errant in your quote,”Second, where were Harry Reid and these Democrats who say they want this change in 2009? Oh, I remember, Harry Reid was majority leader of a FILIBUSTER-PROOF Senate, and the Dems also had a massive majority in the House of Representatives and a Democrat in the White House. They could have had this if they really wanted it.”, Sen. Franken of Minn. swearing in was delayed, by a cunning Republican recount and court battle, for 6 months and the illness of Sen. Kennedy with terminal brain cancer left the Dems approx. 6 months of super majority. https://538refugees.wordpress.com/2011/06/22/the-democratic-super-majority-myth/
      As noted the primary concern was the new HealthCare Law, so your opinion is just that a opinion. Opinion’s are like assholes, everyone has one and some really stink. Regards.


        1. They were able to block the R’s filibuster attempt and pass the ACA. They could have done the same with anything else they chose.


  2. What? Medicaid negotiates lower prices but medicare can’t negotiate that’s why. If the consumer can pay any price why not charge any price. Is the market free or is it manipulated by the drug companies ability to charge any price?
    I think it’s to everyone’s benefit that someone who can pay any price negotiate that price.


  3. I think I have to partially disagree with you on this one Rodger. This is a classic “picking winners and losers” dynamic. I would rather the Govt provide the the drug companies with less subsidies and decrease broad based taxes or increase broad based spending more (all of this assumes we are close to full employment and so there is some tradeoff happening, whereas in reality we are currently nowhere near full output and so giving big pharma more money and increasing broad based benefits wouldnt be unnecessarily inflationary.)

    So I guess, in principle I dont like giving big pharma unnecessary subsidies, but in reality, its not really a big issue right now.


    1. Yes, decrease taxes, and yes increase spending. I agree. But having said that, this is a bit more complex than it seems:

      1. The federal government doesn’t need to negotiate for anything. Negotiation assumes money is a scarce commodity to the government, which of course, it isn’t.

      2. The scarce commodity is the drugs. Rather than negotiate, the federal government needs to encourage.

      There are way to many diseases for which drugs do not exist, or if they exist, are way too expensive.

      The federal government financially should encourage R&D in all phases of science, rather than cutting back like a miserly Scrooge.

      If this means giving more money to pharmaceutical and other companies, what’s the problem with that?

      Anyway, if we simply enacted Step #2 of the Ten Steps to Prosperity, the problem would be solved.


    2. Ok so the drug companies would be placing bids? So the single payer can pick the best product at a reasonable price.


      1. Penny, the expensive drugs are only available from the company that holds the patent. Once they go generic, the cost issue disappears since there are multiple producers. In some cases where there are alternative patent medicines, doctors and patients start with the cheapest one, unless there are indications that a particular one would be better for the specific patient – allergies, for instance.

        The leverage that is used against a monopoly seller is simply that their drug will not be included in the formulary at all, unless they reduce the price.


  4. I don’t think the government should do anything “just because it can.” It should do things that have public purpose, and if it has a choice between courses of action that have public purposes, it should pick the course with the greatest overall public benefit. I can’t think of any public purpose from giving free money to big pharma that couldn’t be better served by giving the same amount of money to medicare patients. On the negative side, this arrangement looks like cronyism (is cronyism, i.e. using government for private benefit) and encourages cynicism. And gives big pharma more dollars with which to buy congresspeople. This practice is at best inefficient, and inefficiency is only excusable if you can’t do any better. We can.


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