The U.S. Department of Health and Human Services recently announced that monthly premiums for beneficiaries covered by the Medicare Part D prescription drug program will actually decrease in 2011.
Indeed, the program continues to work much better than anticipated. As a case in point, Congressional Budget Office estimates show that Part D spending is 46 percent lower than initial 10-year projections.
Yet, despite Part D’s success and its overwhelming popularity among seniors, President Barack Obama, backed by some congressional Democrats, has suggested that Medicare Part D change the way it pays for drugs as a way to extract more savings for the government.
Specifically, he would like it to adopt a Medicaid-like system in which Part D would impose price controls on the drug companies, insisting on pre-set rebates tied to the price average consumers pay for drugs.
Terms like “price controls” and “rebates” may sound good when talking about a government on a budget, until you realize that Part D has already saved that government millions of dollars precisely by eschewing such tactics.
For drug companies to participate in Part D, they must negotiate with the private insurers who administer the plan to arrive at an acceptable price for their drugs.
This pits the drug companies against one another and forces them to bid as low as possible to get access to the millions of beneficiaries Part D represents. Those private insurers must also bid against one another to offer their plans to the public.
The result is a variety of plans and drugs available at the lowest possible prices. It’s the beauty of the market at work.
Lest you dismiss this as armchair economics: when Part D was passed by Congress in 2003, the average monthly premium for 2011 was projected to be $53; instead it is $30. And the Congressional Budget Office now says that Part D will cost the government about 46 percent less between 2004 and 2013 than it originally projected.
But instituting Medicaid-style price controls and rebates would stifle the negotiations that have wrought such success.
The Medicaid system requires pharmaceutical companies to sell their brand-name drugs to states at a discount of 23.1 percent over the average wholesale price, and their generic drugs at a 13.1 percent discount. Those prices must also be the lowest they offer to any consumer.
Not only does this tie the hands of the healthcare professionals doing the negotiations, it incentivizes drug companies to raise prices of their drugs for average consumers.
The result for Part D beneficiaries would be higher premiums-at least 20 percent higher, according to CBO projections-and less choice. The result for consumers at large would be higher prices at the pharmacy.
The pharmaceutical industry itself does not escape harm in this scenario. A recent report from Battelle, a research firm, found that the shift would cost drug companies $20 billion in annual revenue, resulting in as many as 260,000 lost jobs in the United States alone.
And while Coloradans might be slow to shed a tear for a multi-billion dollar industry during hard times, it’s worth remembering that the biopharmaceutical industry invests as much as five times more in terms of research and development relative to its sales than the average U.S. manufacturing company. Take away those profits and you take away the money used to discover the next miracle drug.
Colorado has more than 600,000 Medicare enrollees, not to mention higher-than-average annual enrollment rates. Part D has been a stunning success for those Colorado residents who have chosen to avail themselves of it, and the taxpayers who support it. Thankfully, many in Congress on both sides of the aisle, including our own Reps. Cory Gardner and Ed Perlmutter, have made appeals to leave Medicare Part D alone. Let’s just hope their message is heard.
Kevin McCasky is the president and CEO of the Jefferson County Economic Development Corporation.