Friday, January 12, 2007

Dingell vs CBO

Bloomberg reports today:

The Democratic-led House, defying the Bush administration, passed legislation requiring Medicare to negotiate drug prices with manufacturers....

"It will deliver lower premiums to the seniors, lower prices at the pharmacy, and savings for all taxpayers," House Energy and Commerce Committee Chairman John Dingell, a Michigan Democrat, said on the House floor today.

Two days ago, the Congressional Budget Office told Mr Dingell in a letter:

CBO estimates that H.R. 4 would have a negligible effect on federal spending because we anticipate that the Secretary would be unable to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained by PDPs under current law.
I wonder what evidence leads Mr Dingell to expound a conclusion exactly the opposite from that reached by the Congress's own experts.

Updates: Robert Reich says CBO is right, and he does a good job of explaining why. Meanwhile, a very smart economist (who prefer anonymity) emails me a good explanation:
The drug price negotiation issue is a good one for your econ students. People have this notion that the federal government ought to be able to negotiate a low price because it purchases on behalf of so many patients. But size alone doesn't get you discounts. You need to be able to threaten something if you don't get those discounts. Many folks in Congress don't get that. The federal government can get discounts if it threatens to revoke intellectual property rights (Cipro might fall in that category), it threatens with legal penalties (rebates in Medicaid backed by legal sanctions), or it threatens to not purchase (formularies in the VA). It can't get discounts just by "negotiating".