Medicare Needs More Competition, Not Less
Senate Democrats are finally beginning the process of writing a budget after four years of dereliction. They will almost certainly include some changes to Medicare, the largest driver of federal spending and debt. But unfortunately, there are indications that they intend to focus on the small piece of Medicare (10.6 percent in 2012) that is actually working well: the Medicare Part D prescription drug program.
The drug companies cut a deal with the White House early in Obama’s first term to provide the funding for pro-Obamacare TV commercials and street organizing in exchange for favorable treatment in that bill. But that’s the past, and now they are fair game. President Obama telegraphed it when he attacked drug companies in his State of the Union. And why not?
The idea that life-saving medicines are sold for a profit rather than given away as part of a humanitarian mission seems intuitively wrong to many Americans. So bashing drug companies is a great way to score political points. But it is a proven fact that the profit-motive is the most efficient and effective way to allocate resources ever devised. New miracle cures can cost billions of dollars to bring to market. Without a return on investment providing a return on capital that justifies those huge investments, many fewer cures will be developed and we’ll all be worse off.
I opposed the Medicare prescription drug benefit bill. It largely displaced a well-functioning private market and there were no offsetting spending cuts to pay for it. It created a huge new unfunded liability for federal taxpayers. But it did successfully avoid one of the biggest dangers in a large government-run prescription drug program: the temptation to dictate below-market prices and risk undermining the profit-motive that incentivizes the development of new cures.
It does that by relying on competing private plans. The plans compete intensely to sign up seniors. The incentives are aligned to avoid administrative waste and keep costs down, including negotiating for the best prices on drugs. An amazing 90 percent of seniors are satisfied with their coverage according to a recent survey.
The latest cost estimates from the Congressional Budget Office (CBO) show that over the next 10 years the program will spend 45 percent less than the original estimate. And the premiums paid by seniors are also much lower, about $30 per month for the past three years, which is less than half the original projection.
Yet Democrat Amy Klobuchar of Minnesota has introduced legislation that would require the Secretary of Health and Human Services to negotiate prices directly with drug manufacturers. A version of it is likely to be included in the Democrats’ budget and endorsed by the president.
This is despite the fact that CBO director Doug Elmendorf shot down the idea in 2009 when he said “granting the Secretary of HHS additional authority to negotiate for lower drug prices would have little, if any, effect on prices for the same reason that my predecessors have explained, which is that private drug plans are already negotiating drug prices.”
So there’s no reason to have HHS “negotiate” unless the word actually means something stronger and more dangerous. The only way centralized, government-controlled negotiations could lower prices further would be to restrict the availability of drugs or to impose price controls, which would undermine the incentives for research and development in the next generation of cures. Which means worse health outcomes and higher costs for the rest of Medicare.
Instead of trying to bring more centralized control to the part of Medicare that’s actually working, Congress should focus on bringing the principles of competition and choice to the rest of Medicare.