Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Governments Pay Two Different Prices for the Same Drug
Transcript
- Lucas: So here's a number that stopped me cold this week. The same generic statin—the kind millions of Americans take to lower cholesterol—costs the Department of Veterans Affairs about twelve dollars for a month's supply. Medicare Part D, meanwhile, pays ninety-five dollars for the exact same drug, from the exact same manufacturer. Luna: Wait—same drug, same quantity, same month? That's nearly eight times more. Lucas: Eight times. And it's not an outlier. A 2024 Government Accountability Office report looked at twenty common generics across federal healthcare programs and found that Medicare typically pays two to six times what the VA pays. The question is why, and the answer tells you a lot about how the government spends—or fails to spend—your money. Luna: And honestly, if listening to us walk through the economy has made something click for you, the way this statin stat made me stop—there's a link that keeps this show ad-free and independent. It's buy me a coffee dot com slash fexingo. That's it. Lucas: Yeah, no pressure, no pitch. Just if today's episode felt worth a coffee to you. Anyway—back to the drug pricing gap. The root cause goes back to a single policy choice Congress made in 2003. Lucas: When lawmakers created Medicare Part D, the prescription drug benefit, they explicitly barred the government from negotiating drug prices. It's called the 'non-interference clause.' The VA has no such restriction. It negotiates directly with manufacturers, uses a centralized formulary, and can steer patients to lower-cost options. Luna: So the VA acts like a big private insurer. Medicare Part D acts like a collection of smaller ones, each negotiating alone. Lucas: Exactly. And those smaller insurers—the private plans that administer Part D—they have less leverage, plus they're paid by Medicare based on a complex bidding system that actually incentivizes higher list prices in some cases. It's a mess. Luna: I remember reading that the non-interference clause was sold as a way to keep 'government bureaucracy' out of healthcare. But the result is that taxpayers, who fund both programs, end up overpaying by billions. Lucas: Billions is right. The Congressional Budget Office estimated in 2023 that allowing Medicare to negotiate prices comparable to the VA's would save roughly fifteen billion dollars per year. That's fifteen billion, every year, just for generics. Not even touching brand-name drugs. Luna: And yet Congress hasn't changed it. The Inflation Reduction Act of 2022 gave Medicare limited negotiation power for a handful of brand-name drugs starting in 2026, but generics were specifically excluded. Lucas: Right. So we're sitting here in June 2026, and the biggest source of savings—generic drugs, where most prescriptions are filled—is still off the table. The VA model exists. It works. It's just not applied. Luna: Is there any administrative reason the VA can do it and Medicare can't? Or is it purely political? Lucas: There are real operational differences. The VA has a closed healthcare system—it owns the hospitals, employs the doctors, and has a unified electronic health record. It can mandate which drugs are on the formulary. Medicare Part D is a patchwork of private plans; beneficiaries choose their plan, and each plan has its own formulary. Luna: So you'd have to restructure Part D to make centralized negotiation work. That's a heavy lift. Lucas: It is. But you could take smaller steps. For instance, you could create a common formulary for the most common generics across all Part D plans, and let the government negotiate the price. Plans could still offer their own formularies for other drugs. That alone would capture a lot of the savings. Luna: Has any state tried something similar? Lucas: California actually passed a law in 2023 to create a state-run generic drug label, CalRx, which aims to manufacture and distribute its own generic insulin and other drugs. But that's about production, not purchasing. On the purchasing side, some states have Medicaid programs that pool negotiating power across multiple agencies. But nothing on the scale of Medicare. Luna: It feels like one of those boring structural problems that doesn't get attention because it's not a crisis. But fifteen billion a year is real money. Lucas: It is. And it's not just about saving money. It's about whether the government can competently act as a purchaser. If the VA can get a good deal, and Medicare can't, that's a failure of policy design, not of the market. Luna: What about the pharmaceutical industry's argument that lower prices would reduce research and development? Does that hold for generics? Lucas: No. Generics are off-patent. The R&D was already done, usually by the original brand manufacturer years ago. The generic maker is just copying the molecule. Lower prices for generics don't affect innovation at all. In fact, the brand-name drug companies often argue that higher generic prices don't hurt them either, because they're competing with their own old drugs. So the industry opposition is really about precedent—if the government negotiates on generics, it might eventually negotiate on brands. Luna: And that's the real fight. The non-interference clause was always a proxy for a larger ideological battle about the role of government in healthcare. Lucas: Exactly. And in the meantime, taxpayers keep paying the gap. The statin example is just one data point. But when you multiply it by hundreds of drugs and millions of prescriptions, you're looking at a hidden tax on every American who pays into Medicare. Luna: So what would it take to actually change this? Would it require a new law, or could the executive branch do something? Lucas: It would require Congress to amend the Social Security Act—specifically, the non-interference clause. The executive branch can't unilaterally override a statutory prohibition. So it's up to lawmakers. And so far, the political will hasn't been there, partly because the pharmaceutical industry spends heavily on lobbying, and partly because the savings are diffuse—spread across all taxpayers—while the costs of reform are concentrated on a few powerful interests. Luna: Classic collective action problem. Lucas: Classic. But there is some momentum. The Inflation Reduction Act's brand-name negotiation is a toehold. And as that process starts, Congress will have real data on how negotiation works in practice. That might make it easier to expand to generics a few years down the road. Luna: Or harder, if the industry uses the brand-name negotiation as a scare tactic about government overreach. Lucas: That's the risk. But the VA model is a clear counterexample. The VA has been negotiating prices for decades, and it's not exactly a government takeover of healthcare. It's just a smarter buyer. Luna: I wonder if a future congress will look back at the non-interference clause the way we now look at the 1996 Telecom Act—a well-intentioned piece of legislation that created unintended distortions. Lucas: Maybe. But the distortion here is straightforward: the same government pays two different prices for the same thing, and the higher price comes from the program that covers more people. That's not a complex problem. It's a choice. Luna: And choices can be unmade. Lucas: They can. Whether they will be... that's the bet taxpayers are making every month when their Medicare Part D premium goes out.