Celebrating Waste: Praise for the Medicare Drug Benefit

March 22, 2007

Dean Baker
Truthout, March 20, 2007

See original article on website

In recent weeks, the media have been singing the praises of the Medicare drug benefit. Just like the ads from the pharmaceutical industry, they have pointed out that the drug benefit has helped tens of millions of seniors pay for their drugs, and it is costing less than had previously been projected.

There is some good news in this picture. It is certainly good that the drug benefit is costing less than projected, rather than more than projected. It is also good that seniors are getting some benefit for the hundreds of billions that the government is spending on their behalf. But, it is a pretty low standard if we say that these two facts imply that the Medicare drug benefit is a huge success story that doesn’t need to be repaired.

First, even though the Centers for Medicare and Medicaid Services (CMS) lowered their projections for spending, this is only when compared to projections that were higher than the ones Congress had in its possession when it originally approved the bill. The latest cost projections from CMS are roughly the same as the projections that Congress had to work with when it voted on the bill in 2003.

More importantly, the cost currently projected by CMS is still close to 40 percent higher than what the cost would be if the drug benefit was structured more efficiently. According to the Congressional Budget Office (CBO), the decision to provide the benefit only through private insurers, rather than as an add-on to the traditional Medicare program, increased the price tag for the program by almost $5 billion a year.

The other major reason for waste in the benefit is the rule that prohibits Medicare from negotiating prices directly with the pharmaceutical industry, in the same way as the Veterans Administration. The Veterans Administration is able to negotiate prices that average more than 40 percent less than prices paid by the private insurers that provide the drug benefit.

The combined savings from having Medicare directly provide the benefit and negotiate prices with the drug industry would be more than $30 billion a year. Even in Washington this is real money. This is more than ten times the additional funding that would be needed for the State Children’s Health Insurance Program to meet targets for insuring the country’s children. It is fifteen times the annual subsidy on student loan interest that Congress recently phased in over five years because it lacked the money. In other words, because some people don’t want to reform the Medicare drug benefit, we will not have the money needed to tackle other important public needs.

It is also worth noting why the drug benefit is now projected to cost less than had previously been expected. One of the main reasons is that enrollment is much lower than had originally been projected. CBO now projects that enrollment will be more than 10 percent below its original projection. Apparently, many seniors are finding that the benefit will not provide them with much assistance in paying for their drugs. If 10 percent fewer people enroll, this should translate into roughly a 10 percent reduction in costs. But, the fact that fewer people want to sign up for the program is not a sign of its success.

The other big reason that projected costs have been lowered is that drug prices are rising slower than had been expected. While the Bush administration has been eager to give the Medicare benefit credit for lower drug prices, in reality, the rate of increase in drug prices fell several years before the benefit began in 2006.

The real story of slower growth in drug prices is that the pharmaceutical industry is developing few new drugs, and the ones that they are developing have not been major breakthroughs. The stagnation in the drug-development process has been the topic of recent studies by both the Food and Drug Administration and the Government Accountability Office.

It is not obvious how the drug benefit contributed to this stagnation (the more obvious cause is the corruption associated with patent-financed drug research), but if the Bush administration wants to claim that the Medicare drug benefit has stifled the process of drug development, I suppose we should let them.

The real story here remains the same. The Republican Congress passed a bill that gouges seniors and taxpayers in order to benefit the pharmaceutical and insurance industries. The fact that the gouging may be a bit less than had previously been feared does not mean that the public should accept it. If Congress can ever be forced to answer to the people who vote for them, rather than the people who pay for their campaigns, the benefit will be quickly reformed.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. You can find it at the American Prospect’s web site.

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