In his State of the Union address, President Obama trained his guns on one of his favorite bogeymen: the pharmaceutical industry. The president proposed a multibillion-dollar fee on drug companies by requiring them to issue rebates to the federal treasury on prescription drugs consumed by low-income seniors.
Other Democrats want to go even further. They???re calling for the feds to essentially dictate prices for drugs sold through Medicare. They claim such a move will save even more money.
But neither plan will deliver the savings its backers claim. Even worse, both will raise costs for seniors, deny them access to drugs they need, and dismantle the structure of the only portion of Medicare that has cost less than government projections???the Part D drug benefit.
How the Drug Benefit Works
Medicare Part D leverages the power of market competition to deliver prescription drug coverage to seniors. Private insurance plans compete with one another for seniors??? business, offering different premiums, deductibles, and levels of drug coverage. Seniors can pick the plan that best suits their needs and budget, and the feds subsidize their premiums.
Today, the more than 27 million seniors enrolled in Part D can choose from about a thousand plans nationwide. Nearly 11 million people covered by Part D did not previously have prescription drug coverage. Ninety percent are satisfied with the program, according to KRC Research.
The competitive forces built into Part D have kept costs down. At an average of just $38 a month, premiums are 27 percent below where the government expected them to be. They???ve been essentially flat since 2009, according to the Kaiser Family Foundation.
Saving Taxpayers Money
Low premium costs, in turn, mean less taxpayer money is spent on subsidies. In fact, Part D costs are 40 percent below where the Congressional Budget Office (CBO) initially predicted. Over the past six years, the CBO has lowered its long-term cost projections for Part D by hundreds of billions of dollars.
Try to name one other federal program that can boast such results. Certainly not the rest of Medicare. At the dawn of the program in 1965, Medicare???s Part A hospital insurance program was projected to cost just $9 billion by 1990. The actual cost was more than seven times that???$67 billion.
Why Change Course?
Despite Part D???s success at increasing prescription drug coverage at lower-than-expected cost, Obama and his allies want to fundamentally change the nature of the program.
Obama???s plan would force drug companies to rebate some of the money they make on drug sales to ???dual eligibles??????low-income seniors who qualify for both Medicare and Medicaid. They currently receive drug coverage through Part D.
The federal government already mandates that drug makers generally give Medicaid a 23 percent discount. By requiring a similar rebate for dual eligibles, proponents claim the government would save more than $150 billion over 10 years.
But as former Congressional Budget Office Director Douglas Holtz-Eakin has said, ???That money has to come from somewhere.??? And that somewhere will be other seniors??? pockets.
Holtz-Eakin estimates the rebate scheme will force Part D premiums up by as much as 40 percent. That would add up to $3.7 billion to seniors??? out-of-pocket costs, as drug companies try to recoup the cost of those forced rebates.
Government Pushing Out Markets
As bad as Obama???s plan is, a coalition of Democratic lawmakers and various activist groups want to go even further and have the government take over the role of negotiating drug prices from the private insurance companies.
In effect, they want the government to impose price controls on prescription drugs. They argue Washington bureaucrats could force drug prices down even further, as occurs in the drug benefit for military veterans run by the federal Veterans Administration (VA).
But if the VA is such a great model, why are so many veterans fleeing it? Thirty-eight percent of veterans paid to join Part D in 2010, according to the Department of Veterans Affairs, up from 34 percent in 2006. That???s because the competitive principles that govern Part D have resulted in a marketplace with a wide array of plans that provide access to more drugs than the centralized VA bureaucracy does.
Meanwhile, the CBO has repeatedly said the government will not be able to deliver the savings it promises, writing most recently, in 2009, ???[We] still believe that granting the Secretary of HHS additional authority to negotiate for lower drug prices would have little, if any, effect on prices.???
Part D has succeeded at expanding coverage at low cost precisely because it has operated without too much government meddling. In the end, this fight is less about saving Medicare money than about giving the federal government yet more control over our healthcare system.
Seniors should hope the president and his allies don???t succeed in their quest to upend Part D.
This piece originally appeared at the Heartland Institute. Learn more about what you can do by visiting SaveMedicarePartD.com. Sally C. Pipes (SPipes@pacificresearch.org) is President, CEO, and Taube Fellow in Health Care Studies at the Pacific Research Institute. Her latest book, The Truth About Obamacare, was published in 2010.