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: Here's a number that doesn't get talked about enough. The Department of Veterans Affairs pays about 42 percent less for prescription drugs than Medicare Part D does. Same drugs, same pharmacies, same American patients — just a different federal agency buying them. Luna: Forty-two percent? That's not a rounding error. That's a systemic gap. Lucas: It's structural. And it traces back to one specific line in a 2003 law. The Medicare Modernization Act included a clause — Section 1860D-11 — that explicitly said the government 'may not interfere with the negotiations between drug manufacturers and pharmacies and Part D sponsors.' In plain English: Medicare wasn't allowed to haggle. Luna: So the VA can negotiate, but Medicare — the single largest buyer of prescription drugs in the country — has its hands tied behind its back. Lucas: Exactly. And the price gap reflects that. The VA uses a formulary system: it picks which drugs it will cover, then negotiates volume discounts. It has bargaining power because it can say no. Medicare Part D, by law, has to cover essentially all drugs in six protected classes — so drug makers know they'll get access regardless of price. Luna: How did we get to a point where Congress voluntarily gave up the government's purchasing power? Lucas: The 2003 law was a compromise. The Bush administration wanted to add a prescription drug benefit to Medicare, but they didn't want the government setting prices. So they outsourced price negotiation to private insurance plans and pharmacy benefit managers — PBMs. The idea was that competition among plans would drive prices down. Luna: And did it? Lucas: Partially. Premiums stayed lower than early forecasts. But drug spending overall kept growing faster than inflation. And the price per prescription for brand-name drugs in Part D has been consistently higher than in VA, Medicaid, and even some commercial plans. Luna: So the ceiling didn't fall. The PBMs had incentives to chase rebates, not necessarily the lowest net price. Lucas: Right. A 2021 report from the Government Accountability Office found that for 20 top brand-name drugs, Medicare Part D paid an average of 84 percent more than the VA. For some drugs, the ratio was even higher. One cholesterol medication — the VA paid $14 per prescription; Medicare paid $68. Luna: That's nearly five times as much. For the same molecule. Lucas: Now, the Inflation Reduction Act of 2022 was supposed to change this. It included a provision allowing Medicare to negotiate prices for a limited set of high-spend drugs starting in 2026. Ten drugs in the first year, then fifteen, then twenty. Luna: But that's a far cry from the broad negotiating authority the VA has. Lucas: It is. And the Congressional Budget Office estimated those negotiations would save the federal government about $98 billion over ten years. That's real money, but it's a fraction of the roughly $500 billion Medicare Part D spends over the same period. Luna: And the pharmaceutical industry pushed back hard. Lucas: They filed at least eight lawsuits challenging the negotiation provision, arguing it violates the First Amendment and the Fifth Amendment — that forcing a company to accept a government-set price is an unconstitutional taking of property. Some cases are still working through the courts. Luna: Let's talk about the broader fiscal angle for a second. This isn't just a healthcare story — it's a budget story. Lucas: It absolutely is. Every dollar Medicare overpays for drugs is a dollar that comes from taxpayers or from higher Part B and Part D premiums. The VA's lower prices show the government already has the infrastructure to negotiate — it's just not allowed to use it at scale. Luna: And if the negotiation authority were expanded to more drugs, the savings would be much larger. The CBO has scored various expansion bills in the past, and the numbers run into the hundreds of billions. Lucas: Right. But there's a trade-off. Broader price controls could reduce incentives for pharmaceutical R&D. The industry argues that high US drug prices effectively subsidize innovation for the rest of the world, because other countries negotiate harder. If we clamp down too hard, we might see fewer new drugs. Luna: That's the standard argument. But the counterpoint is that the VA negotiates hard and still gets access to new drugs. And drug companies still spend more on marketing than on R&D for many products. Lucas: Yeah, the R&d versus marketing split is a whole other conversation. Let's stay with the pricing gap for a moment. One interesting consequence of the Inflation Reduction Act is that it's already changing behavior. Some drug companies have started launching new drugs at lower prices to avoid being selected for negotiation later. Luna: Wait — they're voluntarily pricing lower now, preemptively? Lucas: There's evidence. A 2025 analysis from the Kaiser Family Foundation found that the list prices of new brand-name drugs in 2024 were about 15 percent lower than the average for drugs launched in the previous five years. That's not a huge drop, but it suggests companies are adjusting their strategies. Luna: So the mere threat of negotiation might be having an effect before the first negotiated prices even take effect. Lucas: Exactly. And that's the kind of fiscal policy lever that doesn't show up directly in budget scoring. The behavioral response matters too. Luna: Look, I think a lot of our listeners are really thoughtful about how the government spends their money, and honestly, it's conversations like this that keep this show running. We don't have ads, we don't have sponsors, and that's intentional. A small group of listeners chips in monthly through buy me a coffee dot com slash fexingo, and that's what makes it possible to dig into stuff like the VA versus Medicare pricing gap for an entire episode. Lucas: Yeah, seriously. It's a straight trade — no ads means we can spend time on the details that actually matter. And the support from listeners is what keeps that possible. So if you've gotten something out of the show, that's the way to keep it going. Luna: Alright, back to the gap. One more thing I want to hit — how does this play out for patients? If you're a veteran, you pay less out of pocket for drugs. If you're on Medicare, you might pay more. Is that fair? Lucas: It's not a question of fairness in the abstract — it's a question of how Congress designed two different programs. The VA is an integrated health system. It owns hospitals, employs doctors, and negotiates prices directly. Medicare Part D is a fragmented system of private plans. The structure drives the price difference. Luna: So the fix isn't just 'let Medicare negotiate' — it's also about how Medicare buys drugs structurally. Lucas: Right. Some policy experts have proposed creating a Part D 'public option' that would use va style negotiation. Others want to delink PBM compensation from drug list prices. The Inflation Reduction Act takes a step, but it's a small one. The bigger question is whether Congress will ever repeal the non-interference clause entirely. Luna: And that's a political question as much as a fiscal one. Lucas: Always is. But the numbers are clear: 42 percent gap, $98 billion in projected savings from limited negotiation, and a system where the same drug costs the government wildly different amounts depending on which agency buys it. That's the kind of inefficiency that fiscal policy exists to address. Luna: And we'll have to see whether the courts let the first round of negotiated prices take effect in 2026. Lucas: Exactly. That's the next big test. If the prices hold, the policy could expand. If they're struck down, we're back to the status quo — and the va medicare gap stays wide open.