The brouhaha over Medicare and prescription drugs escalated this week with an irresponsible story in The Washington Post on Wednesday claiming that ?the new Medicare prescription drug benefit will cost more than $1.2 trillion in the coming decade,? triple the original cost estimates.

But Post reporters Ceci Connolly and Mike Allen made two huge mistakes and so far are resisting White House demands to correct their story:

1) They reported only the top-line $1.2 trillion cost of the drug benefit without subtracting $468 billion in new federal revenues anticipated from beneficiary premiums, state payments, and Medicaid savings. The net cost is $724 billion, the number reported in virtually every other responsible major newspaper around the country.

2) The new budget estimates cover a different time period from the original calculations, a fact that the Post buried. The 2006 budget estimates cover two additional years, 2014 and 2015, when many more seniors will be on the program. While $724 billion is a huge expenditure, Medicare administrator Mark McClellan emphasized that the new budget figures for each individual year are virtually unchanged from the original estimates.

All of this has, of course, given those who opposed the drug benefit from both the right and the left new ammunition, with the $1.2 trillion figure being recklessly bantered around.

It also has given new material to supporters of legalizing drug imports from Canada and those calling for the federal government to ?negotiate? prices.

What both of these groups are advocating is imposing price controls on prescription drugs, either by importing price controls from abroad or having our own government set them here.

The political pressure behind drug importation defies reason. For example, the HHS task force on drug importation provided detailed information about the safety risks to patients and to the U.S. drug supply. And with the U.S. dollar slipping and with added fees that Canadian Internet pharmacies charge, Americans increasingly find they can get a better deal by shopping at home.

For example, Maryland’s Montgomery County recently said its plan to allow drug imports from Canada was no longer cost-effective. The average savings to Americans on brand-name drugs from Canada fell from 38% at the start of 2003 to just 29% by the end of 2004, according to a January report by

Most Americans can do better by shopping at home. Private plans are negotiating prices for drugs right now as part of the Prescription Drug Discount Card program, in which more than 6.2 million seniors are participating. The savings range from 15% to 30% off retail prices and up to 75% on generics.

Throughout 4,000 years of history, price controls haven’t worked because central planners never get the prices right. The only way to continually find the best and lowest price is through competitive negotiation, which is exactly what is going on with the Medicare discount card plans right now.

Unfortunately overshadowed in all of this messy debate are the very good health policy proposals that President Bush put forward in his 2006 budget proposal (see page 19). Key features and 10-year spending projections:

? $74 billion: A refundable income tax credit to cover 90% of the cost of a health insurance policy, up to a maximum of $1,000 for individuals and $3,000 for families. The income limits to qualify remain at $30,000 for individuals and $60,000 for families. The credit could be used either for traditional health insurance, for an HSA, or to buy into state-sponsored purchasing pools.

? $4 billion: Grants to the states to help establish health insurance purchasing pools.

? $1 billion: A two-year national outreach campaign called Cover the Kids to sign up children eligible for, but not enrolled in, Medicaid and the State Children’s Health Insurance Program.

? $28 billion: An above-the-line tax deduction for high-deductible health insurance purchased in conjunction with a Health Savings Account.

? $23 billion: A rebate to small companies (with fewer than 100 employees) who establish HSAs for their workers. Rebates can be up to $200 for individuals and $500 for families.

? $179 million: Improvements to the existing tax credit allowed under the Trade Adjustment Assistance Reform Act of 2002.

? Three other initiatives included in the budget message but which don’t require budget allocations: Association Health Plans, medical liability reform, and creating a national marketplace for health insurance by allowing people to buy health insurance across state lines.

Together and individually, these ideas would move us toward a properly-functioning market in the health sector, with more consumer control over choices and spending decisions.

Grace-Marie Turner


? Tax reform and health insurance

? Drugmakers under siege: Hampering the search for cures for tomorrow’s epidemics

? Medicaid needs surgery

? Bush to unroll tax breaks to help cover health insurance

? FDA drug officers: Working in the dark

? Health Savings Accounts: Making patients better consumers

? Europeans unhappy with socialized medicine turn to private sector


Author: Robert B. Helms, Ph.D.

Source: American Enterprise Institute, January-February 2004

?Changing the 1943 policy on the exclusion of employer-provided health insurance from taxable income may not be popular, but the sooner we bite that bullet, the sooner we begin the journey toward a more efficient health care system,? writes Bob Helms of the American Enterprise Institute. Helms discusses the influence of tax policy on the current health care system and provides a concise analysis of the main options for reforming the tax treatment of health insurance: reduce the tax exclusion; reduce the business tax deduction; expand the deductibility of personal health expenditures; establish a new deduction for HSA policy premiums; and expand the use of tax credits.

Helms also recommends three policy changes that could move toward a more efficient health care system: ?First, efficient reform requires some form of a tax cap as an upper limit on the tax exclusion?Second, a new program of refundable tax credits could be used to promote the twin objectives of increasing coverage for low-income workers and promoting the growth of market-based insurance?Third, [HSAs] have the potential to exert a strong influence on consumers and providers alike to seek both better quality and more cost-effective care.?

Full text:,filter.all/pub_detail.asp


Author: Doug Bandow

Source: Institute for Policy Innovation, 12/15/04

?Innovative treatments for such problems as AIDS, heart disease, and breast cancer demonstrate how we all benefit from profitable drug manufacturers and abundant pharmaceutical research,? writes Doug Bandow for the Institute for Policy Innovation. ?For instance, two decades ago not one drug was available to fight AIDS. Today, 74 have been approved and another 83 are in development.? But government involvement, through price controls, reductions in patent rights, restrictive drug formularies, and imports from price-controlled countries, threatens to reduce ?bold innovation and relentless experimentation, which are characteristics of a competitive, profit-driven market.? Bandow argues ?drugmakers are under siege in America,? and instead of cutting industry returns, government should cut industry costs by expediting FDA approval of new drugs.

Full text:


Author: David Gratzer, M.D.

Source: The Weekly Standard, 02/14/05

Governor Jeb Bush’s innovative Medicaid reform proposals could be an answer to spiraling Medicaid costs across the nation, writes Dr. David Gratzer of the Manhattan Institute. Medicaid, which is jointly funded by the federal government and the states, costs more than $300 billion a year, and the Congressional Budget Office estimates that it will cost almost $600 billion a year by 2012. In Florida, where Medicaid is more comprehensive than many private plans, Medicaid spending has increased 13% annually and now accounts for about 25% of the state budget. As a result, Gov. Bush’s proposal involves ?getting the state out of the business of micromanaging Medicaid.? Under his plan, Medicaid recipients ?would qualify for a set, need-based amount of money? which they could use to pick a plan among competing insurance company offerings. ?Governor Bush’s plan offers a way out, overcoming the federal-state divide. It allows governors to give recipients more choice, yet rein in spending by increasing competition among insurance plans,? concludes Gratzer.

The Wall Street Journal also published an editorial praising Governor Bush’s Medicaid reform proposals, noting that ?the Sunshine State’s vision could serve as a template for reforms in other states.?

Full text: 

Full text of Wall Street Journal editorial (subscription required):



Author: Ricardo Alonso-Zaldivar

Source: Los Angeles Times, 02/05/05

President Bush’s proposed budget, which will call for $142 billion over 10 years, could help as many as 14 million people acquire health insurance, writes Ricardo Alonso-Zaldivar, staff writer for the Los Angeles Times. A $74-billion tax credit to help working-age individuals and families buy health insurance is the plan’s centerpiece. ?Worth as much as $3,000 for a family of four, the credit could be used to cover the cost of high-deductible insurance and health savings accounts, or traditional coverage,? writes Alonso-Zaldivar. ?In another incentive for combining catastrophic medical insurance and health savings accounts, Bush will also call for a new tax deduction to help offset the cost of premiums for high-deductible health insurance, and a rebate program for small businesses that contribute to employees’ health savings accounts.?

Full text:,1,1053474.story?coll=la-health-consumer-news&ctrack=1&cset=true


Author: Scott Gottlieb, M.D.

Source: Medical Progress Today, 02/03/05

Years of budget cuts and shortsighted planning have left the Food and Drug Administration (FDA) behind the information curve and can be blamed for the agency’s recent problems with drug safety monitoring, writes Scott Gottlieb of the American Enterprise Institute. ?The Agency’s information technology systems are antiquated, and its ability to digest the reams of scientific data it receives with drug applications is severely hampered as a result,? writes Gottlieb. In addition, the agency’s current passive reporting process, which relies on others to undertake the time and cost of safety monitoring, is ?engineered only to catch the worst possible outcomes – a recipe for catastrophic drug safety failures.? Gottlieb recommends ?robust systems capable of proactively gathering information about the performance and safety of new drugs? and ?datamining systems that allow it to collect more information about a drug’s use in the real world.?

Full text:


Authors: Paul D. Mango and Vivian E. Riefberg

Source: The McKinsey Quarterly, January 2005

Health Savings Accounts (HSAs) mark ?the first time, since the introduction of employer-funded health premiums?the government is authorizing health insurance plans that are consistent with efficient markets,? write Paul D. Mango and Vivian E. Riefberg of McKinsey & Company, a global consulting firm. ?These plans at least partially end the third-party payer system and force people to make economic trade-offs between consuming more health care and other goods and services,? write the authors. Although the rate at which consumer-driven health plans will be adopted is uncertain, the authors believe ?that acceptance by even 15 to 20% of the insured population will prompt fundamental changes in the businesses of payers and providers.?

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Author: Rebecca Goldsmith

Source: Newhouse News Service, 02/08/05

?Fed up with long waits and worried about the quality of medical care, European patients are losing faith in government-run health systems [and] many now seek medical care abroad and buy private health insurance,? writes Rebecca Goldsmith, European correspondent for The Star-Ledger. The number of Britons with private medical coverage increased 10% during the past five years, and health tourism is also quickly becoming a ?mainstream alternative to socialized medicine,? as more Europeans use the Internet to shop around for medical procedures. As a result, some European governments are ?handing parts of their public health-care systems to the private sector? as they look to ?the United States and other countries where capitalism guides health care.? Goldsmith notes that England’s National Health Service is undergoing the ?most radical change? as it shifts ?to a system where it acts as more of a regulator than a primary provider.?

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Updating and Personalizing Medicare

Manhattan Institute Luncheon Forum

Monday, February 14, 2005, 12:00 pm – 2:00 pm

New York, NY

This event will feature Dr. Mark McClellan, Administrator, Centers for Medicare & Medicaid Services. RSVP by phone at 212-599-7000 Ext. 411 or by e-mail to

Shortening Drug Approval Times via Industry Funding of the FDA: Did Legislation Help or Hurt?

AEI-Brookings Joint Center Event

Wednesday, February 16, 2005, 10:00 a.m.-1:45 p.m.

Wohlstetter Conference Center, Twelfth Floor, AEI

Washington, D.C.

For additional details and registration information, go to:

Does Medicaid Crowd Out Private Long-Term Care Insurance?

AEI Health Policy Discussion

Thursday, February 17, 2005, 2:30 p.m.-4:00 p.m.

Wohlstetter Conference Center, Twelfth Floor, AEI

Washington, D.C.

For additional details and registration information go to:

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

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Elizabeth Lamirand, editor