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As you are well aware, an unexpected spike in the cost of medical care poses a direct threat to future state budgets. This year’s $1.2 billion budget shortfall could look paltry in comparison to future deficits if out-of-control health spending is not addressed. I write on behalf of nearly 300,000 members and supporters of Citizens for a Sound Economy Foundation (CSE Foundation) to urge you to address Medicaid costs and balance the state budget through comprehensive reform, not piecemeal price caps and regulations.
While CSE Foundation recognizes the need to reign in runaway health care spending, a better strategy would be to use the current financial crisis to institute a complete overhaul of the program by relieving it of some obvious inefficiencies and structural problems. Of particular concern to CSE Foundation are attempts to cap the price, or restrict the availability, of prescription drugs to Medicaid beneficiaries in the state of Washington.
Price caps destroy incentives for innovation, create supply shortages, and limit consumer autonomy. In addition to economic harm, price caps would also create an artificial barrier between patients and their doctors. Given the overwhelming evidence of prescription drugs’ effectiveness as preventive medical treatment, plans designed to limit prescription drug spending will often lead to a dramatic increase in overall medical spending.
A study by Columbia University economist Frank Lichtenberg found that every $1 in prescription drug spending saved $4 in hospital care. This is because prescription drugs are often used for preventive care, to prevent more debilitating- not to mention more expensive- medical conditions. While a $600 annual prescription for cholesterol-reducing drugs Zoo and Libitor may seem expensive, if they can avert a $300,000 hospital stay and bypass surgery, they are more than worth the investment.
The use of financial incentives to drive down the prices of drugs prices, such as rebates on particular drugs, or formularies, are essentially a hidden tax on the provision of drugs in the state. Beyond the obvious problems with states’ authority in interstate commerce, this strategy would greatly restrict drug availability and turn Washington into a second-class state in regard to pharmaceutical innovation.
Scarce resources, like pharmaceutical innovations, are best allocated through the free market, not government intervention. Benefits that are too lavish, or hide the actual cost to the beneficiary, will lead to unsustainable public sector growth. Similarly, formularies and price caps will increase Washington’s budget for medical services, while reducing the quality of health care at the same time.
But most of all, price caps or formularies should be rejected because they do nothing to address the underlying problem with explosive medical spending. Programs like Medicaid that try to cut costs in the aggregate do not force beneficiaries to budget. As a result, the consumer enjoys what economists call, “unconstrained optimization,” where a consumer is not bound by constraints or spending limits. This has an upward pressure on prices because consumers get nothing in return for making prudent financial decisions.
A plan for reform should be based on the establishment of refundable tax credits for catastrophic insurance and a state-administered medical savings program, where beneficiaries would receive money to be used for routine medical needs, but be allowed to roll over, or keep, unused funds. Medicaid is designed to ensure that low-income people are able to get health care services. It is not designed to shield beneficiaries from rational decisions. Any program that disguises costs and fails to provide incentives for conscientious behavior is doomed to fail.
Such dramatic reform would require approval from the Department of Health and Human Services, but given Secretary Tommy Thompson’s fondness for states’ rights, there may never be a better opportunity than now. The state of Washington would be far better served if its Medicaid program were comprehensively reformed. Myopic proposals to cut spending by attacking the most cost-effective feature of the state’s Medicaid system would ultimately rise the cost of care, fail to address the real problems, and harm public health in the process.
President and CEO
Citizens for a Sound Economy