No More Bad Medicare Policies for a Debt Limit Deal: They Cost Too Much!

Kathryn Nix /

The Hill reports that conservatives in Congress are considering extending Medicaid drug rebates to low-income seniors participating in the Medicare prescription drug program (Part D) as part of a deficit reduction deal to increase the debt limit.

Transforming certain federal health programs—i.e., Medicare and Medicaid—is crucial to making a meaningful dent in the debt, but ideas like this one are best left in the Pandora’s box of bad health policy.

Low-income seniors dually eligible for Medicare and Medicaid used to receive drug coverage solely from Medicaid, but after the advent of Medicare Part D, they were placed into this defined contribution drug system, where they currently enjoy wide access to a number of affordable, private options. The proposal on the table would require drug manufacturers to return a portion of beneficiaries’ drug costs back to the federal government, creating an indirect price-control scheme.

Applying rebates to Part D is one of the Congressional Budget Office’s March 2011 deficit reduction policy options, and they claim it would save $112 billion over a decade. Liberals have eyed price controls in Part D for a while, and fiscal conservatives may be tempted by the savings they claim. But they shouldn’t be fooled: Part D is the only part of Medicare that meets seniors’ needs and comes in under budget, thanks to its market-based structure.

Under the wrong policies, that could change in a heartbeat. The negative consequences of applying rebates to Part D are numerous, and would hurt both low-income and high-income seniors as well as the non-elderly privately insured.

Rebates would apply for all Part D beneficiaries who receive low-income subsidies in the program, or about 40 percent of participants. These individuals now receive drug coverage with no premium thanks to a financing structure that removes incentives for insurers to avoid high-risk patients. But as the American Enterprise Institute’s Joseph Antos writes, “Upsetting the balance that has been achieved in Part D could result in poorer program performance and disruption for enrollees who have the lowest incomes and the poorest health.”

The rebates would limit the ability for insurers and manufacturers to negotiate drug prices, impeding those plans’ ability to compete with others that cover fewer low-income seniors. This would discourage health plans from enrolling high-risk, low-income patients. In addition, according to Antos, this population would likely enjoy fewer affordable options, meaning higher premiums, more cost-sharing, or more restrictive drug benefits.

High-income Part D enrollees would more immediately feel the pain of increased costs, and effects would extend throughout the system to impact even the non-elderly privately insured. Part D price controls would also hurt research and development in the pharmaceutical industry. Writing for Heritage, health policy expert Cheryl Smith and Laura Summers explain:

Given [the] demand expectation for new drugs, pharmaceutical firms have been willing to invest in less-promising projects (such as delay-onset) in addition to the projects they believe will succeed. Funding for such ventures comes, in part, from profits yielded by Medicare Part D sales. Given a reduction in return on investment, a reduction in innovation is sure to follow. Clearly, the public pricing scheme used to pay for drugs invented and developed in the private market strongly affects the level of innovation.

Finally, even if the rebates did create “new revenue,” the net reduction in spending would be nominal, if existent at all, due to the disastrous ripple effects. Increases in the costs of drug plans and the reduction in R & D would increase spending in other areas, and, as PhRMA Deputy Vice President Karl Uhlendorf told The Hill, “Such policies would fundamentally alter the competitive nature of the program and undermine its success.”

The market-based structure of Medicare Part D is not responsible for out-of-control federal spending on health care. Instead, it is the aging population, rising health costs in the health care sector at large, and (most importantly) the incentives built into traditional Medicare that reward volume of services over high-value care. Rather than interfere with Part D, where choice and competition are working to contain costs, Congress should apply the principles guiding its success to the rest of the Medicare program. Heritage’s Saving the American Dream proposal leads the way.