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Why We Should Embrace Obama's Call for Medicare Death Panels

In his speech on the deficit today President Obama proposed reforms to the way Medicare pays for drugs that, in any other universe, would be regarded as non-partisan, sensible (and easy) cuts to government spending. Unfortunately, one of those reforms is a Medicare Death Panel. At least, that's how Republicans will paint it.

So it's time to say it aloud: Medicare needs a death panel. Medicare is one of the largest areas of government spending. A death panel -- as proposed -- would save a lot of money, bring some rationality to the way pharmaceuticals are prescribed, and raise standards for drugmakers who want taxpayers to pay for pricey new drugs that offer only marginal health gains.

Of course, Obama didn't literally propose a Medicare death panel. Here's what he actually said:

... we will slow the growth of Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers who will look at all the evidence and recommend the best ways to reduce unnecessary spending while protecting access to the services seniors need.
That sounds to me a lot like NICE, which is the contrived acronym for the U.K.'s National Institute for Health and Clinical Excellence. NICE judges drugs and other clinical practices for the British National Health Service. If it believes a drug is effective and worthwhile, it allows the NHS to provide it for free to all Brits. But often it finds that new drugs offer barely perceptible gains for patients, and it rules that the NHS should not provide the drug. For example, NICE is currently considering whether a lung cancer drug from Roche (RHHBY) should get a thumbs up or thumbs down.

Conservatives regard this as a death panel because it means some patients won't get new, experimental drugs -- and they might die as a result. That's true. (Although they might die anyway, too.) But conservatives always forget to mention that those drugs remain available to patients if they want to pay for them, just as they are in the U.S. -- either with cash or insurance. NICE is merely saying you can't have them for free on the taxpayer's dime.

Untie the taxpayers' hands
Obama also proposed giving Medicare the power to use its bulk buying power to negotiate drug prices:

We will cut spending on prescription drugs by using Medicare's purchasing power to drive greater efficiency and speed generic brands of medicine onto the market.
Currently, the law requires Medicare to follow an easily manipulated formula in which drug companies set prices and Medicare has to pay for them without complaint. This insane system has led to years of spiralling Medicare costs. Matthew Herper of Forbes asks:
What is Medicare going to do, tell Dendreon that it won't pay for its Provenge treatment, which has been shown in clinical trials to extend the lives of cancer patients by a median 4 months (that means half the patients get more than four months) because Provenge costs $93,000 a year?
Yes, pretty much. That's exactly what Medicare needs to do when faced with excessively expensive drugs that give half their patients less than four months of life. Medicare need not ban the drug, but it could pay less based on its marginal benefit. If it were even more entrepreneurial it could base its payments on the success of the drug by linking payments to the actual months of survival experienced by patients.

Conservatives will hate this because they believe that Ayn Rand warned against it in Atlas Shrugged; that drug companies have made valuable products and now the government wants to "steal" them for free. But the current situation is even more "socialist" -- it's basically a welfare state for drug companies in which the taxpayer bails out any product they care to launch, regardless of its quality.

Price negotiations work in practice, too. In 2010, Greece announced it would reduce what it pays for drugs in its national health system by 25 percent. The Danish diabetes company Novo Nordisk (NVO) said it would pull its drugs from the country. But after a few months of negotiation, a compromise was reached, and Novo agreed to take a price cut. By year's end, Novo's revenues increased 19 percent to DKK60.7 billion and its net income increased 34 percent to DKK14.4 billion

Greece got its cheap drugs and Novo continued to print money. What's not to like?


Image by Flickr users nmfbihop and eleanor ryan, CC.
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