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In 1965, Congress and President Johnson decided that the hospital costs of elderly Americans would be socialized. Soon thereafter, routine doctor’s visits and other treatments were included under the Medicare umbrella in exchange for a monthly premium deducted from beneficiaries’ Social Security checks. With outpatient prescription drugs taking on a more fundamental role in health care due to an abundance of new drug breakthroughs and treatments, it may seem logical to expand Medicare’s portfolio to socialize these costs as well.
The U.S. Senate will be given the chance to do so this week when it will decide whether to subsidize lower middle class seniors and those with catastrophic drug costs. This “compromise” bill is estimated to cost $400 billion over ten years, roughly $30 billion more than the original Republican plan and $200 billion less than the Democrat plan, both of which failed to garner the 60 votes necessary to pass the Senate. The legislation is well intentioned in that it targets those with lower incomes and higher costs, but poorly designed: The drug benefit would be administered through the current Medicare bureaucracy, which is already collapsing under its own weight.
Despite its political success, Medicare has been a public policy failure. Without reform, it will be on financial life-support in just over 20 years. Its top-down cost control strategy has failed by any objective measure. Reimbursement disputes between beneficiaries and the Medicare bureaucracy last, on average, over a year and a half. Medicare pays too much for medical services in some parts of the country and far too little in others. Many doctors now routinely refuse to take Medicare beneficiaries. Centralized political decision-making has placed hospitals across the nation in a straitjacket with financial viability determined by last second Congressional appropriations. All in all, Medicare as it is currently constructed is in a state of disrepair.
Given the Medicare bureaucracy’s well-known effects on health care delivery, when Senate Democrats say that they want a Medicare prescription drug benefit, they are really saying that they want to nationalize the nation’s drug delivery system. This issue is larger than traditional questions about fiscal sanity and the efficiency of government because it will directly affect future medical research and innovation. A drug benefit administered through Medicare would destroy incentives for research and development by creating a new and unpredictable political risk for drug innovators.
Right now, drug development is extraordinarily risky. Fewer than 1 in 10 drugs developed will ever enter the market. The ubiquity of such failure has pushed the average cost of bringing a drug to market to $800 million. Private capital is devoted for such speculative activity only because of the possibility for supra-normal profits from a few “blockbuster” drugs. The new Medicare drug regulators will meet their budget constraints by taking dead aim at such blockbusters: they will reduce the price manufacturers of these drugs may charge, or limit the number of beneficiaries who can get them. This is not speculation; many state Medicaid administers have already instituted formularies and “supplemental rebates” to cap drug prices and limit access.
Similarly, Medicare, and CMS (formerly known as the Health Care Financing Administration (HCFA)), contains costs on procedures like hip replacements and colon cancer screenings through arbitrary pricing policies with little regard for their effect on supply.
And let us not forget that the supply of medical services, professionals, drugs, and therapies is the main driver of the actual cost of health care. In 2030, Social Security will consume roughly 6 percent of GDP, but this requires nothing more than a transfer payment from workers to retirees. Unlike Social Security, where Congress can decide arbitrarily how much money to allot each beneficiary, the cost of health care coverage is dependent upon the size and efficiency of our health care delivery system. Simply put, if the number of urologists is not sufficient to meet the number of cases of prostate cancer in a given region, it does not matter how much money Congress appropriates for cancer treatment.
Medicare and Medicaid are expected to amount to 9 percent of GDP in 2030, but could account for as much as two-thirds of our nation’s total health care spending. In 2000, these socialized medical systems were only 24 percent of total health care spending and 3.4 percent of GDP. If Congress acts to depress incentives for investment in the nation’s health care infrastructure, Medicare and Medicaid could crowd out other treatments and spending options, leading to rationing not only for those in America’s socialized medical systems, but for all patients.
No matter how politically advantageous it would be for Senate Republicans to vote for the drug “compromise,” if Republicans wish to be seen as the party of less government and more freedom they cannot vote for the greatest expansion of Medicare in history. Instead, Republicans should use political support for a drug benefit as the catalyst necessary for serious discussions about Medicare reform based on defined contributions.
Such a plan could reduce Medicare expenditures, improve access to care, and provide drug benefits to seniors. Not bad selling points for a policy position that has drawn little or no attention from anyone in this politically charged debate.