Democrats seem obsessed with finding new and inventive ways of robbing Peter to pay Paul. President Obama and congressional Democrats want to extend large rebates now required on drugs sold through the Medicaid program to prescription drugs used by “dual eligibles” - that is, seniors who qualify for Medicare and Medicaid - as well as seniors who are eligible for low-income subsidies under Medicare’s Part D prescription drug program.
The White House claims that the new rebates would “reduce excessive payments by leveraging Medicare’s purchasing power,” and House Democrats claim that the rebates would “eliminate a sweetheart deal for brand-name drug manufacturers.” It would do neither, and would, in fact, likely raise prices for most seniors in Medicare prescription-drug plans. It also might reduce choice of plans and limit access to innovative new drugs.
The Medicare Part D prescription-drug program is enormously popular with seniors, with approval ratings close to 90 percent. It is one of the few government-subsidized health programs that actually came in under original cost estimates, thanks to the program’s emphasis on competition among private drug plans.
That competition will be undermined by Democrats’ attempt to increase price controls on prescription drugs, according to a report released Thursday by former Congressional Budget Office Director Douglas Holtz-Eakin and Michael Ramlet of the American Action Forum. Millions of middle-income seniors will face billions of dollars in higher Part D premiums.
On average, the private rebates on brand-name drugs in the Part D program are impressive - 20 percent to 30 percent below going rates - but not as low as the Medicaid statutory rebate, which Mr. Holtz-Eakin and Mr. Ramlet estimate at 40 percent. This has led Democrats to argue that expanding the rebate to dual eligibles and low-income seniors would lower prices and increase savings for seniors. This view reflects a flawed understanding of market economics.
Government price controls are far from cost-free to producers in the Medicaid program. Doctors see fewer Medicaid patients and drug companies shift the cost of Medicaid rebates onto private insurers in the form of higher drug prices. Inflicting additional rebates on Medicare Part D is likely to produce similar cost shifts, but the impact here would be much more significant, because Medicare represents a larger part of the U.S. drug market.
Using data from the Lewin Group, a Medicare actuary, Mr. Holtz-Eakin and Mr. Ramlet examine the impact of mandatory Medicaid rebates on seniors in Part D who aren’t eligible for subsidy support. As a base line, they assume (conservatively) that half of the cost of the rebate either would be absorbed by drug companies - in the form of reduced employment, wages or reductions in new drug research - or passed along to consumers in private insurance plans. The remainder of the rebate would be shifted onto middle-income seniors, who pay their full premiums out of pocket.
Under the low-impact scenario, they assume that drug makers respond to mandatory Medicaid rebates for low-income seniors by reducing rebates available to drug plans across the board - that is, those including both low-income and middle-income seniors. Since the mix of low- and middle-income seniors varies across plans, this is an unlikely outcome. In fact, plans with more middle-income seniors likely will see larger price increases.
Still, even in the low-impact scenario, premiums for seniors would increase by nearly 20 percent.
Under a high-impact scenario, where costs are borne entirely by middle-income Part D enrollees, seniors could see their premiums rise by 40 percent. Overall, Mr. Holtz-Eakin and Mr. Ramlet conclude that out-of-pocket drug costs would rise by $1.5 billion to $3.7 billion annually, depending on the actual impact on premiums. Also, drug plans could react to large price increases by reducing access to brand-name drugs or eliminating some plans entirely.
Democrats ignore the enormous savings that market competition produces in the Part D program every year. This is a point underscored by another recent report on the Part D program by Murray Aitken of the IMS Institute for Healthcare Informatics and economist Ernst Berndt of the Massachusetts Institute of Technology.
Mr. Aitken and Mr. Berndt note that when prescription drugs lose patent protection, generic competitors enter the market and produce copies approved by the Food and Drug Administration for a fraction of the original drug’s price because generic drug companies don’t have to bear the enormous costs of drug development. Prescription drug plans, in their competition for enrollment, passed much of this generic savings to consumers.
In fact, Mr. Aitken and Mr. Berndt note that from 2006 to 2010, “expirations of patent protection and the substitution of generics for brands played a major role” in eight out of the 10 classes of drugs with the largest volume of sales in the Part D drug program, experiencing a decline in the daily cost of therapy from $1.50 to $1 a day. Additional patent expirations expected in the next five years, they estimate, will further reduce the aggregate cost of therapy to just 65 cents per day.
Rather than penalizing drug makers for participating in one of the few market successes in Medicare, policymakers should focus on reforming the entire program by using the same principles of consumer choice and market competition. They can start by abandoning the idea of more price controls for Part D.