The Right Prescription: A drug benefit that makes sense

Appeared in National Review’s 2003 Health-Care Symposium

In early June, Senate Finance Committee leaders reached a surprise bipartisan agreement on a Medicare prescription-drug benefit bill, paving the way for passage after years of deadlock. The House is expected to follow, dramatically increasing the odds that a bill will reach President Bush’s desk before the 2004 elections shift into high gear.

Passing a drug bill is a top priority for the Republican leadership in both houses, and the White House is pushing hard for the bill to allow not only for a drug benefit but also for modernization of Medicare itself. As both sides begin to look at details of the latest agreement, the test for conservatives will be whether the bill veers too far from the goals of injecting viable market competition into the Medicare program.

Conservatives want coverage to be offered through private plans that would provide a full set of benefits, including prescription drugs. The bill must fit within the $400 billion that Congress has set aside for Medicare updates over ten years. Medicare recipients could choose from an array of private health plans structured like the Preferred Provider Organizations (PPOs) already popular with working Americans. Government would oversee the plans but would not control every service.

Liberals, on the other hand, will be watching to ensure that government is very involved in setting the rules. The ClintonCare battles of 1993-94 showed that most Americans don’t want the government to control their health care. But it already controls Medicare, which covers those over age 65 and the disabled. Medicare is our version of a single-payer health-care system, and as such is particularly vulnerable to expansion of overnment control. It’s crucial that the final legislation take a hands-off approach to program updates.

Senior citizens like Medicare, even though its coverage is substandard compared to that offered through most private health insurance. Medicare covers only 53 percent of seniors’ health costs, leaves them exposed to large hospital bills, delays or denies adoption of new technologies, and pays doctors so little that many are now refusing to accept new Medicare patients.

President Bush believes that the time is right to fix Medicare. Rather that merely tacking on a drug benefit, the president wants to reshape the entire program to work more like the popular Federal Employees Health Benefits Program (FEHBP), which currently provides health benefits to members of Congress and federal workers. Instead of micromanaging every benefit – Medicare has 110,000 pages of regulations and 4,000 pricing systems – a new agency would negotiate a set rate with private plans in order to provide a range of health benefits to seniors, from hospital and doctor care to preventive services and prescription drugs. The agency would first take bids from competing private plans, then inform seniors of their choices and ensure that the plans fulfill their contracts. Government would provide a contribution toward the premiums, and seniors could choose the plan that best suits their needs. (Under FEHBP, federal workers now have a choice of twelve national health plans and many more at the local and regional levels.) If seniors prefer to stay in the current fee-for-service Medicare, they would have that option too.

This year, Medicare will spend more than $250 billion on 41 million seniors – over $6,000 per person. And most seniors pay thousands more in Medicare premiums and deductibles, supplementary coverage, and other out-of-pocket costs. That’s surely large enough to attract a vibrant market. Still, the new program must be structured to allow real competition to take place. Companies offering seniors a managed-care option through the current Medicare+Choice program have been dropping out. They complain that they are too much under the thumb of the Centers for Medicare and Medicaid Services, thanks to both excessive regulation and skimpy payments. This year, reimbursement for M+C rose by only 2 percent; health-plan costs are rising by 10 to 15 percent.

Sen. Bill Frist, the Republican majority leader, and Rep. Bill Thomas, the (Republican) chairman of the House Ways and Means Committee – along with Democratic senator John Breaux – have been leaders in developing an improved Medicare program. All three served on the National Bipartisan Commission on the Future of Medicare, created with the blessing of Bill Clinton, to map a course for Medicare reform. But Clinton pulled the plug on their recommendations in 1999, for what many consider to have been political reasons. Medicare reform has drifted ever since.

Chairman Thomas is working with Energy and Commerce Committee chairman Billy Tauzin (R., La.) to update a bill they co-authored last year and that has passed the House twice. The bill – which would include the drug benefit delivered by private plans – would lay the foundation for a modernized Medicare program.

Meanwhile, a group of House Republicans, most of whom serve on the Energy and Commerce Committee, is developing a competing bill that would offer a discount card with a cash deposit (determined on a sliding income scale), coupled with insurance coverage against very high, or “catastrophic,” drug costs – in addition to program modernization. Many House Republicans are worried about the impact of any new drug-benefit bill that would expand government’s reach. “We’re shooting with real bullets, now,” one observed.

The White House is encouraging all parties to incorporate as much as possible of the president’s framework for Medicare modernization to give seniors three options: 1) traditional Medicare with drug discounts and catastrophic coverage; 2) “enhanced Medicare” based on the FEHBP model; and 3) “Medicare advantage” – a new and improved version of the M+C managed-care option.

The Senate has been the obstacle to passage of the drug-benefit bill in the last two sessions of Congress. This year’s bipartisan deal was likely the result of pressure by Senate Democrats up for reelection in 2004. Last year, senators on both sides of the aisle thought they could protect themselves from seniors’ ire by voting for one of the four drug-benefit bills the Senate considered. But none of the bills passed. Seniors clearly want action, and this year, neither side seems willing to risk not supplying it.

It may seem strange that Medicare bill costing $400 to $900 billion over ten years could be so crucial to the future of the health sector, which will see $1.4 trillion in spending this year alone. But the key to it all is prescription drugs. Seniors use four times more drugs than younger Americans. If the government controls 40 percent of drug purchases, it will become such a dominant player that it will essentially set the prices for the entire industry, since all other payers will benchmark off the government.

In all other industrialized nations, thanks to government dominance of the health sector, prices are set so low that they don’t cover development costs – meaning that innovation is screeching to a halt. With Tufts University researchers estimating that it now costs $897 million to bring a single new drug to market, the chances are slim that drug companies would continue to make this kind of risky investment with the government as its primary customer.

Policy analysts believe that the United States not only can continue to lead the world in new medical technologies, but can also chart a new course in how health care is financed. But it is imperative that Congress use any drug-benefit legislation to build a foundation for a market-based Medicare program in which benefits are delivered by private, competing plans. Seniors should have incentives to make wise purchasing decisions, and plans should have incentives to institute coordinated care and disease-management programs. Policymakers should be especially vigilant against the danger of government-run catastrophic coverage – which is an open invitation to expand Medicare’s administered pricing structure to cover virtually all of the drugs consumed by seniors.

The danger in the bills being considered by Congress this summer is that government would bear the risk for high-end drug expenses for seniors choosing to enroll in a separate drug plan. Today, the United States remains the only major nation in which the bulk of the health-care market is not restricted by government price controls. Consequently, we pay a disproportionate share of development costs for new drugs and devices, bearing the burden for other rich countries such as Canada, Germany, France, and the U.K. If the United States, too, defaults to the failed European model, where are we – or they – to turn for medical innovation?




Grace-Marie Turner is president of the Galen Institute, a not-for-profit research organization based in Alexandria, Va., that focuses on free-market ideas for health reform.

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About the author

Appeared in National Review’s 2003 Health-Care Symposium

In early June, Senate Finance Committee leaders reached a surprise bipartisan agreement on a Medicare prescription-drug benefit bill, paving the way for passage after years of deadlock. The House is expected to follow, dramatically increasing the odds that a bill will reach President Bush’s desk before the 2004 elections shift into high gear.

Passing a drug bill is a top priority for the Republican leadership in both houses, and the White House is pushing hard for the bill to allow not only for a drug benefit but also for modernization of Medicare itself. As both sides begin to look at details of the latest agreement, the test for conservatives will be whether the bill veers too far from the goals of injecting viable market competition into the Medicare program.

Conservatives want coverage to be offered through private plans that would provide a full set of benefits, including prescription drugs. The bill must fit within the $400 billion that Congress has set aside for Medicare updates over ten years. Medicare recipients could choose from an array of private health plans structured like the Preferred Provider Organizations (PPOs) already popular with working Americans. Government would oversee the plans but would not control every service.

Liberals, on the other hand, will be watching to ensure that government is very involved in setting the rules. The ClintonCare battles of 1993-94 showed that most Americans don’t want the government to control their health care. But it already controls Medicare, which covers those over age 65 and the disabled. Medicare is our version of a single-payer health-care system, and as such is particularly vulnerable to expansion of overnment control. It’s crucial that the final legislation take a hands-off approach to program updates.

Senior citizens like Medicare, even though its coverage is substandard compared to that offered through most private health insurance. Medicare covers only 53 percent of seniors’ health costs, leaves them exposed to large hospital bills, delays or denies adoption of new technologies, and pays doctors so little that many are now refusing to accept new Medicare patients.

President Bush believes that the time is right to fix Medicare. Rather that merely tacking on a drug benefit, the president wants to reshape the entire program to work more like the popular Federal Employees Health Benefits Program (FEHBP), which currently provides health benefits to members of Congress and federal workers. Instead of micromanaging every benefit – Medicare has 110,000 pages of regulations and 4,000 pricing systems – a new agency would negotiate a set rate with private plans in order to provide a range of health benefits to seniors, from hospital and doctor care to preventive services and prescription drugs. The agency would first take bids from competing private plans, then inform seniors of their choices and ensure that the plans fulfill their contracts. Government would provide a contribution toward the premiums, and seniors could choose the plan that best suits their needs. (Under FEHBP, federal workers now have a choice of twelve national health plans and many more at the local and regional levels.) If seniors prefer to stay in the current fee-for-service Medicare, they would have that option too.

This year, Medicare will spend more than $250 billion on 41 million seniors – over $6,000 per person. And most seniors pay thousands more in Medicare premiums and deductibles, supplementary coverage, and other out-of-pocket costs. That’s surely large enough to attract a vibrant market. Still, the new program must be structured to allow real competition to take place. Companies offering seniors a managed-care option through the current Medicare+Choice program have been dropping out. They complain that they are too much under the thumb of the Centers for Medicare and Medicaid Services, thanks to both excessive regulation and skimpy payments. This year, reimbursement for M+C rose by only 2 percent; health-plan costs are rising by 10 to 15 percent.

Sen. Bill Frist, the Republican majority leader, and Rep. Bill Thomas, the (Republican) chairman of the House Ways and Means Committee – along with Democratic senator John Breaux – have been leaders in developing an improved Medicare program. All three served on the National Bipartisan Commission on the Future of Medicare, created with the blessing of Bill Clinton, to map a course for Medicare reform. But Clinton pulled the plug on their recommendations in 1999, for what many consider to have been political reasons. Medicare reform has drifted ever since.

Chairman Thomas is working with Energy and Commerce Committee chairman Billy Tauzin (R., La.) to update a bill they co-authored last year and that has passed the House twice. The bill – which would include the drug benefit delivered by private plans – would lay the foundation for a modernized Medicare program.

Meanwhile, a group of House Republicans, most of whom serve on the Energy and Commerce Committee, is developing a competing bill that would offer a discount card with a cash deposit (determined on a sliding income scale), coupled with insurance coverage against very high, or “catastrophic,” drug costs – in addition to program modernization. Many House Republicans are worried about the impact of any new drug-benefit bill that would expand government’s reach. “We’re shooting with real bullets, now,” one observed.

The White House is encouraging all parties to incorporate as much as possible of the president’s framework for Medicare modernization to give seniors three options: 1) traditional Medicare with drug discounts and catastrophic coverage; 2) “enhanced Medicare” based on the FEHBP model; and 3) “Medicare advantage” – a new and improved version of the M+C managed-care option.

The Senate has been the obstacle to passage of the drug-benefit bill in the last two sessions of Congress. This year’s bipartisan deal was likely the result of pressure by Senate Democrats up for reelection in 2004. Last year, senators on both sides of the aisle thought they could protect themselves from seniors’ ire by voting for one of the four drug-benefit bills the Senate considered. But none of the bills passed. Seniors clearly want action, and this year, neither side seems willing to risk not supplying it.

It may seem strange that Medicare bill costing $400 to $900 billion over ten years could be so crucial to the future of the health sector, which will see $1.4 trillion in spending this year alone. But the key to it all is prescription drugs. Seniors use four times more drugs than younger Americans. If the government controls 40 percent of drug purchases, it will become such a dominant player that it will essentially set the prices for the entire industry, since all other payers will benchmark off the government.

In all other industrialized nations, thanks to government dominance of the health sector, prices are set so low that they don’t cover development costs – meaning that innovation is screeching to a halt. With Tufts University researchers estimating that it now costs $897 million to bring a single new drug to market, the chances are slim that drug companies would continue to make this kind of risky investment with the government as its primary customer.

Policy analysts believe that the United States not only can continue to lead the world in new medical technologies, but can also chart a new course in how health care is financed. But it is imperative that Congress use any drug-benefit legislation to build a foundation for a market-based Medicare program in which benefits are delivered by private, competing plans. Seniors should have incentives to make wise purchasing decisions, and plans should have incentives to institute coordinated care and disease-management programs. Policymakers should be especially vigilant against the danger of government-run catastrophic coverage – which is an open invitation to expand Medicare’s administered pricing structure to cover virtually all of the drugs consumed by seniors.

The danger in the bills being considered by Congress this summer is that government would bear the risk for high-end drug expenses for seniors choosing to enroll in a separate drug plan. Today, the United States remains the only major nation in which the bulk of the health-care market is not restricted by government price controls. Consequently, we pay a disproportionate share of development costs for new drugs and devices, bearing the burden for other rich countries such as Canada, Germany, France, and the U.K. If the United States, too, defaults to the failed European model, where are we – or they – to turn for medical innovation?




Grace-Marie Turner is president of the Galen Institute, a not-for-profit research organization based in Alexandria, Va., that focuses on free-market ideas for health reform.

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About the author