Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Government Health Programs Overpay for Drugs by 50 Percent
Transcript
- Lucas: Here's a number that should make anyone who pays taxes wince: the federal government pays about 50 percent more for the same brand-name prescription drugs through Medicaid and Medicare Part D than the Veterans Health Administration does. Luna: Fifty percent? That's huge. Same government, same drugs, different price tags. Lucas: Exactly. And it's not because the VA has some secret buying power. It's because Congress gave the VA a statutory tool it explicitly denied to every other federal health program: the authority to directly negotiate drug prices with manufacturers. The result is that the VA pays roughly the same prices as other developed countries, while Medicare and Medicaid pay American list prices minus opaque rebates that don't flow back to patients. Luna: So this is a self-inflicted wound. Let's talk about how that happened. Lucas: The story goes back to two key laws. First, the Omnibus Budget Reconciliation Act of 1990 created the Medicaid Drug Rebate Program. It requires manufacturers to give Medicaid the 'best price' they offer to any private buyer—but that best price excludes the VA, the Department of Defense, and other federal purchasers. So manufacturers can charge the VA a low price without triggering a lower Medicaid rebate. Second, when Medicare Part D was created in 2003, a provision called the non-interference clause explicitly banned the government from negotiating drug prices. That clause was a gift to the drug industry, written into law. Luna: And that clause stayed until the Inflation Reduction Act of 2022, which finally gave Medicare the power to negotiate prices for a small set of drugs. But not until 2026, and only for 10 drugs initially. Lucas: Right. The VA, by contrast, has had direct negotiation authority since the early 1990s. It maintains a national formulary—a list of preferred drugs—and it can exclude drugs that don't offer a fair price. That's leverage. And the VA exercises it. A 2021 report from the Government Accountability Office found that the VA's prices for the top 20 brand-name drugs were on average 48 percent lower than what Medicare Part D paid. The pattern is consistent across classes: for cholesterol drugs, blood thinners, diabetes medications, the VA pays less. Luna: Let's get concrete. I'd love a specific example. Lucas: Sure. Take the blood thinner Eliquis—apixaban is the generic name. It's one of the most expensive drugs in Medicare Part D. In 2022, Medicare spent roughly $12 billion on Eliquis, making it the top drug by spending. The VA negotiates a net price around $90 per month. Medicare Part D plans, after rebates, pay around $220 per month. That's more than double. And patients on Medicare often face coinsurance based on the list price, so they end up paying more out of pocket too. Luna: So the VA gets a deal that looks like what other countries pay. Meanwhile, Medicare and Medicaid are effectively subsidizing the rest of the world's low prices. Lucas: That's one way to put it. Economists call it the 'drug development cost recovery' argument—that US prices fund R&D for everyone. But even if you accept that logic, it doesn't explain why the VA can pay so much less and still get the same drugs. The real difference is the VA's willingness to say no. It has a closed formulary. If a manufacturer won't offer a good price, the VA simply doesn't list that drug, and doctors use an alternative. That's negotiation with teeth. Luna: Whereas Medicaid's 'best price' rule actually works in the manufacturer's favor. They have to give Medicaid their lowest private price, but they can give the VA an even lower price without penalty. So the VA gets a special discount, and everyone else pays more. Lucas: Precisely. And the non-interference clause in Part D meant that private insurance plans—the Part D plans—were the ones negotiating, not the government. But those plans have incentives that don't perfectly align with lowering list prices. They negotiate rebates, but those rebates are often tied to market share and aren't transparent. So a plan might prefer a drug with a high list price and a big rebate because the rebate lowers their net cost, but the patient pays coinsurance based on the list price. It's a system that inflates list prices and hurts beneficiaries. Luna: This is one of those episodes where a walk through the economy with us has made something click, hasn't it? Lucas: It really has. And honestly, this kind of deep-dive—connecting procurement rules to real dollar waste—is exactly why listener support matters. We keep this show ad-free and independent, and it's listeners who make that possible. Luna: Yeah, if you find value in understanding how your tax dollars work—or don't—a small contribution at buy me a coffee dot com slash fexingo helps us keep going. No pressure, just appreciation. Lucas: So back to the mechanics: why hasn't Congress fixed this? There have been bipartisan bills. In 2025, a group of senators introduced the 'Fair Prices for Patients Act,' which would have allowed Medicare to negotiate prices for the 50 highest-spend drugs without the Inflation Reduction Act's limitations. It died in committee. Luna: Stalled by industry lobbying, I assume? Lucas: Partially. But also by genuine disagreement over how to balance innovation incentives with budget savings. The drug industry argues that lower prices reduce revenue and therefore R&D investment. It's a legitimate concern, but the VA's experience suggests there's room to cut without crushing innovation. The VA pays less, and they still get new drugs. The difference is that the VA doesn't cover every new drug automatically. It waits for evidence of comparative effectiveness. Luna: Which is something Medicare and Medicaid don't do systematically. They can't say no to a drug that's fda approved. The VA can. Lucas: Exactly. The VA uses health technology assessment, similar to what the UK's National Institute for Health and Care Excellence does. They ask: does this new drug offer enough benefit over existing treatments to justify its price? If not, they don't add it to the formulary. That kind of gatekeeping is politically difficult for broader programs. Voters don't like being told their drug isn't 'worth it.' Luna: So the political economy is tough. But the fiscal cost is enormous. A 2024 report from the Congressional Budget Office estimated that extending va level pricing to all federal health programs would save about $200 billion over ten years. Lucas: And that's just direct savings to the government. It doesn't count the lower out-of-pocket costs for beneficiaries. For seniors on fixed incomes, paying coinsurance on a $500 monthly drug versus a $200 one is a real burden. Luna: Let's talk about the Inflation Reduction Act's negotiation provision. It's the first real crack in the non-interference wall. How is it working so far? Lucas: The IRA allows Medicare to negotiate prices for a small number of drugs starting in 2026. The first round covers 10 drugs, including Eliquis, Jardiance, and Xarelto. The process is still unfolding, but the Centers for Medicare and Medicaid Services published the initial 'maximum fair prices' in late 2025. The discounts range from about 40 to 70 percent off list prices. That's significant, but it's not va level. And the negotiation is constrained: manufacturers can refuse to negotiate, but then they face an excise tax. So it's compulsory, but the government can't set a price as low as it wants—it's bounded by a formula based on average market prices. Luna: So it's a step, but not a leap. Lucas: A step. And a fragile one. If the political winds shift, the next Congress could weaken or repeal it. The pharmaceutical industry is already challenging it in court, arguing that it violates the Fifth Amendment's takings clause. That case, 'Merck v. Becerra,' is pending in the Supreme Court. A decision could gut the program before it's even fully implemented. Luna: Meanwhile, states aren't waiting. California, Oregon, Colorado—they've all started exploring or implementing their own drug pricing boards or importation programs. Lucas: Right. Colorado's Prescription Drug Affordability Board, established in 2021, began setting upper payment limits for certain high-cost drugs in 2024. It's too early to tell if it'll survive legal challenges, but it's a laboratory. If it works, it could become a model for other states. The key question is whether state-level boards have enough market power to move prices. They don't cover nearly as many lives as Medicare does. Luna: So the real leverage is still at the federal level. And the simplest fix might be to extend the VA's authority to Medicare and Medicaid. Why hasn't that happened? Lucas: Political will. The drug industry spends hundreds of millions on lobbying and campaign contributions. And the fear of 'rationing' is a powerful talking point. Opponents frame closed formularies as denying patients access to the latest treatments. But the VA's formulary covers all major drug classes and has a robust appeals process. It's not rationing; it's value-based purchasing. The military uses a similar system. So does the British NHS. Americans are just culturally averse to the idea of a government agency deciding what's worth paying for. Luna: But we're paying for it anyway, just inefficiently. We're paying for the same drugs at a 50 percent markup. Lucas: Exactly. And that markup flows to drug company profits and shareholder returns, not to patient health. The question is whether the Inflation Reduction Act's gradual negotiation will be enough, or whether we need to revisit the VA model. I'd argue that the most concrete thing a listener can take away is this: the difference between VA prices and Medicare prices isn't a mystery. It's a policy choice. The VA proves that the government can negotiate effectively. The barrier isn't economic; it's political. Luna: So the next time someone says 'the government can't negotiate drug prices,' you can point to the VA and say it already does, and it saves billions. Lucas: That's the takeaway. And with Medicare's first negotiated prices coming in 2026, and a Supreme Court case looming, we'll have a much clearer picture of whether the US is finally ready to follow its own successful example.