Victory in the Medicare Drug War?

Dean Baker

In 2000, both George Bush and Al Gore promised a Medicare drug ben­e­fit if they got elect­ed. Mil­lions of seniors were hav­ing dif­fi­cul­ty pay­ing for their drugs, the cost of which was grow­ing at the rate of 10 per­cent a year. Seniors final­ly saw this cam­paign promise become a real­i­ty at the begin­ning of 2006, as Pres­i­dent Bush’s Medicare drug ben­e­fit, passed by Con­gress in Novem­ber 2003, came into effect. It is prob­a­bly not quite what they had in mind.

As it is cur­rent­ly struc­tured, the ben­e­fit requires seniors to nav­i­gate their way through dozens of com­pet­ing insur­ance plans, each of which has dif­fer­ent options con­cern­ing co-pays, deductibles, pre­mi­ums, the range of drugs cov­ered and the prices charged for each drug. The choice of plans is fur­ther com­pli­cat­ed by the fact that insur­ance com­pa­nies can change the prices charged for drugs, even though seniors are tied to their plan for most of the year.

In addi­tion to being com­pli­cat­ed, the ben­e­fit doesn’t real­ly address the prob­lem of high drug costs. Even with the ben­e­fit, many seniors will still find drugs to be a severe bur­den. In fact, because of the sharp increase in drug costs since 2000, Medicare ben­e­fi­cia­ries will be pay­ing more in 2006 with the ben­e­fit than they did in 2000 with­out it. Since drug costs are pro­ject­ed to con­tin­ue to rise at a 9 per­cent annu­al rate, this bur­den will grow rapid­ly in the years ahead. The drug ben­e­fit also takes up a sub­stan­tial chunk of the fed­er­al bud­get, cost­ing more than $700 bil­lion over its first 10 years. At a time when cut­backs are pro­posed for every­thing from food stamps to can­cer research, this looks like real money.

It didn’t have to be this way. Con­gress could have estab­lished a sim­ple drug ben­e­fit that was an add-on to the exist­ing Medicare pro­gram. This would be com­pa­ra­ble to the drug cov­er­age that most peo­ple have through pri­vate insur­ers, with ben­e­fi­cia­ries required to make mod­est co-pay­ments depend­ing on the type of drug they buy. (The co-pay­ments would be sub­si­dized for low-income ben­e­fi­cia­ries, as is now done with Med­ic­aid.) Estab­lish­ing a sin­gle cen­tral­ized sys­tem to admin­is­ter the ben­e­fit would have saved almost $50 bil­lion over the first ten years, accord­ing to the Con­gres­sion­al Bud­get Office.

There could be even larg­er sav­ings if Medicare used its enor­mous bar­gain­ing pow­er to nego­ti­ate low­er prices with the phar­ma­ceu­ti­cal indus­try. For exam­ple, in Aus­tralia, which has the low­est drug prices of all indus­tri­al­ized coun­tries, the gov­ern­ment nego­ti­ates direct­ly with the phar­ma­ceu­ti­cal com­pa­nies. The result is that drugs there cost on aver­age 45 per­cent less than in the Unit­ed States. A sim­i­lar approach could save the Unit­ed States $800 bil­lion over the program’s first 10 years.

The sav­ings from a cen­tral­ized sys­tem and nego­ti­at­ed prices would be so large that the mon­ey the gov­ern­ment is cur­rent­ly pro­ject­ed to pay under the Bush plan would be enough to com­plete­ly cov­er seniors’ drug needs, elim­i­nat­ing co-pay­ments, deductibles, pre­mi­ums or gaps in cov­er­age. In anoth­er sce­nario, if Con­gress had designed an effi­cient drug plan, seniors could pay mod­est pre­mi­ums and co-pay­ments, and the fed­er­al and state gov­ern­ments could save per­haps $100 to $200 bil­lion of the funds com­mit­ted to the Medicare drug plan. More­over, under a bet­ter designed plan, seniors would not have to spend hours surf­ing the Web to deter­mine their best option.

But Con­gress thought it was more impor­tant to meet the needs of the insur­ance and phar­ma­ceu­ti­cal indus­tries. Rather than autho­riz­ing Medicare to build on its own suc­cess­ful sys­tem, the Repub­li­can bill actu­al­ly pro­hibits Medicare from offer­ing a drug plan and nego­ti­at­ing direct­ly with the phar­ma­ceu­ti­cal indus­try. The insur­ance indus­try would almost cer­tain­ly lose out if it was forced to com­pete with Medicare, which does not have mas­sive mar­ket­ing expens­es, high­ly paid CEOs and share­hold­ers who demand dividends.

Sim­i­lar­ly, the low­er prices that Medicare could nego­ti­ate with the phar­ma­ceu­ti­cal indus­try would mean low­er drug indus­try prof­its – an out­come that Pres­i­dent Bush and the Repub­li­can Con­gress were not about to back.

For­tu­nate­ly, this is an elec­tion year. The Medicare drug bill offers a rare oppor­tu­ni­ty for the Democ­rats, if they care to take it. In both the House and Sen­ate, Rep. Jan Schakowsky (D‑Ill.) and Sen. Dick Durbin (D‑Ill.) have pro­posed bills that set up a Medicare drug ben­e­fit that would save seniors and the gov­ern­ment hun­dreds of bil­lions of dollars.

News accounts and polling data sug­gest that seniors are out­raged by the Bush administration’s drug ben­e­fit. A Decem­ber 15 Wall Street Jour­nal poll showed that peo­ple over age 64 dis­ap­proved of the new drug plan by a mar­gin of 40 per­cent to 23 per­cent. Seniors vote in vast­ly dis­pro­por­tion­ate num­bers in off-year elec­tions. In addi­tion, there is an exten­sive grass­roots net­work in place after last year’s vic­to­ry on Social Secu­ri­ty. Many of the orga­ni­za­tions that suc­cess­ful­ly defend­ed Social Secu­ri­ty, such as Cam­paign for America’s Future and USAc­tion, would glad­ly join the bat­tle for a decent Medicare drug benefit.

In Wash­ing­ton, there is a joke that the dif­fer­ence between Repub­li­cans and Democ­rats is that Repub­li­cans try to win elec­tions. If the Democ­rats don’t make fix­ing the drug ben­e­fit a top elec­tion pri­or­i­ty in 2006, then the joke is on them once again.

Dean Bak­er is co-direc­tor of the Cen­ter for Eco­nom­ic and Pol­i­cy Research and co-author of Social Secu­ri­ty: The Pho­ny Cri­sis (Uni­ver­si­ty of Chica­go Press, 2000).
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