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Press Release

Active Ingredient: Politics


No election year legislative session would be complete without the obligatory overture to senior voters through a proposed Medicare prescription drug benefit. Both Senate Democrats and House Republicans have fashioned plans to offer drug “insurance” for Medicare beneficiaries under the current Medicare system. The Republican bill would keep prescription drugs out of the Center for Medicaid and Medicare Services’ (CMS, formerly HCFA) portfolio, but do little to address the inefficiency and exploding costs underlying the current Medicare system.

The Senate Democrats’ bill is predictable in that it is costly ($500-$800 billion over the next ten years), provides no flexibility for beneficiaries, and would be administered in the same hyper-centralized fashion (courtesy of the aforementioned CMS) as the current Medicare system. Their plan would require seniors to pay a $25 monthly premium and no deductible, with a $10 copayment for generic drugs and a $40 copayment for brand-name medications. However generous, the proposal is deeply flawed in that it rewards CMS for its horribly inefficient administration of the current Medicare system by handing it control of prescription drug procurement as well.

The great lesson gleaned from the failure of socialized medicine – whether in other developed nations like Britain and Canada, or at home with Medicare and Medicaid – is that when patients are not forced to base health care consumption decisions on the actual cost of treatment, inefficiency abounds and costs escalate uncontrollably. With no choice or competition in the system, bureaucrats respond to escalating costs in the aggregate, meaning that bean counters with little regard for proper treatments or individual needs cut reimbursement rates and restrict access to certain treatments.

With 77 million Medicare beneficiaries on the horizon, cost containment will be an important part of any prescription drug benefit. Under the Senate plan, the only way for CMS to reduce costs would be to limit access to, and cap the price of, prescription drugs, just as it currently does for conventional medical treatments. Moreover, many state health care bureaucracies have already implemented formularies and supplemental rebates to ration the prescription drugs available through Medicaid. While these hidden taxes on the privately insured undermine pharmacological research and development, if such rationing took hold on the federal level, the effect on drug innovation could be catastrophic.

While the Senate plan would be an unmitigated disaster for taxpayers, patients, and the future of medical innovation, the Republican plan is not without flaws of its own. Cognizant of the failures of centralized health care administration, the Republican proposal would subsidize private insurers to offer prescription drug coverage to seniors. The cost of the Republican plan would begin at $350 billion over ten years, but could easily exceed this estimate given the artificial nature of the “prescription drug only” insurance market.

Insurance companies develop sophisticated actuarial tables to assess risk and then price insurance policies to relieve consumers of that risk accordingly. How such tables could be devised for prescription drug insurance is anyone’s guess. Not only do patients take prescription drugs voluntarily, but the 35 percent of seniors with no prescription drug coverage – ostensibly the group targeted by legislators – are well aware of their drug costs because they currently pay out-of-pocket. Absent government coercion to force everyone into the plan – something the Republican bill specifically forbids – there will be no way to avoid adverse selection, where no efficient premium price can be calculated because the only seniors who would apply for coverage are the ones with disproportionately high drug costs.

Republicans should be commended for trying to avoid the bureaucratic pitfalls of the Senate proposal, but their plan is really an unworkable social assistance program masquerading as private “insurance.” If enacted into law, it would almost certainly result in unforeseen cost overruns, insurers swiftly exiting the market, or both. The worst case scenario would be a boondoggle on par with the discredited California electricity “deregulation” scheme: a product of weak political will that pays lip service to markets, but ultimately sets back fundamental reform by 10 years.

The only plausible way to provide prescription drugs to seniors using a private insurance model would be to reform the Medicare system in its entirety. To properly pool for and assess individual risk, the plan would necessarily involve all Medicare beneficiaries and include all health care consumption to allow insurers to defray the costs of prescription drugs through savings in other areas. Not only would this improve seniors’ access to medicines, but also dramatically improve Medicare’s dire financial outlook and efficiency in the process.

Economists suggest that every $1 spent on prescription drugs equates to $4 saved in conventional medical care. Insurers understand the preventive value offered by prescription drugs and would gladly cover them as part of an overall health care insurance package if given the opportunity. Unfortunately, the Republicans seem intent on pushing a contrived arbitrage scheme instead of real reform.