Medicare Has Tried Price Controls–and Failed

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House Speaker Nancy Pelosi released her prescription drug price-control legislation on Sept. 19, and the best thing we can say about it is that it probably won’t pass the Senate and become law.
The Democrats’ summary of the legislation states, “If a drug manufacturer refuses to participate in any part of the negotiation process or does not reach agreement with HHS, they will be assessed a Non-Compliance Fee starting at 65 percent of the gross sales of the drug in question and increasing by ten percent every quarter the manufacturer is out of compliance, up to a maximum of 95 percent.” (emphasis added)
So if a drug company refuses to accept the government-determined price for a new drug, the government will confiscate up to 95 percent of all revenue from the sale of the drug. As IPI pointed out in its press release, that’s not a penalty, that’s extortion.
And while the essentially mandated “negotiations” specifically relate to drugs used in the Medicare and Medicaid programs, the companies would also be penalized if they don’t provide the same price to all payers.
But the problem isn’t prices, it’s spending.
Democrats (and some Republicans) think by controlling prices they can control spending. That may be a reasonable assumption, it just happens to be wrong. And we know because Medicare has already tried using price controls to control spending, and it utterly failed.
Back in the early 1980s, Medicare spending was exploding, rising from $36.8 billion in 1980 to $72.3 billion in 1985.
So Congress imposed price controls on hospital procedures by creating what’s known as Diagnosis Related Groups (DRGs). The government would pay a fixed price (with some variations) for each diagnosis.
Proponents claimed the price control system was a “free market” solution, since efficient hospitals would do well and inefficient hospitals would have to improve or close. Medicare spending continued its climb, rising from $72.3 billion in 1985 to $111 billion in 1990.
So Congress came back in the early 1990s and imposed Medicare price controls on physicians. Yet Medicare spending rose to $184.2 billion by 1995 and $221.8 billion by 2000.
While Medicare spending climbed for a few years after implementation of the Part D prescription drug program, the growth in spending has slowed—only increasing by about 7 percent in the five years between 2010 and 2015, even with the addition of the baby boomers retiring in large numbers.
Ironically, the one place where Medicare spending has been much lower than predictions is Part D. That’s where real negotiations occur between the drug manufacturers and health insurers, not so-called negotiations backed up by a confiscation of nearly all of a new drug’s revenue if the manufacturer doesn’t agree to the government’s price.
If Democrats want to lower prescription drug spending, maybe they should expand that model.

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