Victory in the Medicare Drug War?

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Dean Baker
In These Times, March 21, 2006

In 2000, both George Bush and Al Gore promised a Medicare drug benefit if they got elected. Millions of seniors were having difficulty paying for their drugs, the cost of which was growing at the rate of 10 percent a year. Seniors finally saw this campaign promise become a reality at the beginning of 2006, as President Bush’s Medicare drug benefit, passed by Congress in November 2003, came into effect. It is probably not quite what they had in mind.

As it is currently structured, the benefit requires seniors to navigate their way through dozens of competing insurance plans, each of which has different options concerning co-pays, deductibles, premiums, the range of drugs covered and the prices charged for each drug. The choice of plans is further complicated by the fact that insurance companies can change the prices charged for drugs, even though seniors are tied to their plan for most of the year.

In addition to being complicated, the benefit doesn’t really address the problem of high drug costs. Even with the benefit, many seniors will still find drugs to be a severe burden. In fact, because of the sharp increase in drug costs since 2000, Medicare beneficiaries will be paying more in 2006 with the benefit than they did in 2000 without it. Since drug costs are projected to continue to rise at a 9 percent annual rate, this burden will grow rapidly in the years ahead. The drug benefit also takes up a substantial chunk of the federal budget, costing more than $700 billion over its first 10 years. At a time when cutbacks are proposed for everything from food stamps to cancer research, this looks like real money.

It didn’t have to be this way. Congress could have established a simple drug benefit that was an add-on to the existing Medicare program. This would be comparable to the drug coverage that most people have through private insurers, with beneficiaries required to make modest co-payments depending on the type of drug they buy. (The co-payments would be subsidized for low-income beneficiaries, as is now done with Medicaid.) Establishing a single centralized system to administer the benefit would have saved almost $50 billion over the first ten years, according to the Congressional Budget Office.

There could be even larger savings if Medicare used its enormous bargaining power to negotiate lower prices with the pharmaceutical industry. For example, in Australia, which has the lowest drug prices of all industrialized countries, the government negotiates directly with the pharmaceutical companies. The result is that drugs there cost on average 45 percent less than in the United States. A similar approach could save the United States $800 billion over the program’s first 10 years.

The savings from a centralized system and negotiated prices would be so large that the money the government is currently projected to pay under the Bush plan would be enough to completely cover seniors’ drug needs, eliminating co-payments, deductibles, premiums or gaps in coverage. In another scenario, if Congress had designed an efficient drug plan, seniors could pay modest premiums and co-payments, and the federal and state governments could save perhaps $100 to $200 billion of the funds committed to the Medicare drug plan. Moreover, under a better designed plan, seniors would not have to spend hours surfing the Web to determine their best option.

But Congress thought it was more important to meet the needs of the insurance and pharmaceutical industries. Rather than authorizing Medicare to build on its own successful system, the Republican bill actually prohibits Medicare from offering a drug plan and negotiating directly with the pharmaceutical industry. The insurance industry would almost certainly lose out if it was forced to compete with Medicare, which does not have massive marketing expenses, highly paid CEOs and shareholders who demand dividends.

Similarly, the lower prices that Medicare could negotiate with the pharmaceutical industry would mean lower drug industry profits—an outcome that President Bush and the Republican Congress were not about to back.

Fortunately, this is an election year. The Medicare drug bill offers a rare opportunity for the Democrats, if they care to take it. In both the House and Senate, Rep. Jan Schakowsky (D-Ill.) and Sen. Dick Durbin (D-Ill.) have proposed bills that set up a Medicare drug benefit that would save seniors and the government hundreds of billions of dollars.

News accounts and polling data suggest that seniors are outraged by the Bush administration’s drug benefit. A December 15 Wall Street Journal poll showed that people over age 64 disapproved of the new drug plan by a margin of 40 percent to 23 percent. Seniors vote in vastly disproportionate numbers in off-year elections. In addition, there is an extensive grassroots network in place after last year’s victory on Social Security. Many of the organizations that successfully defended Social Security, such as Campaign for America’s Future and USAction, would gladly join the battle for a decent Medicare drug benefit.

In Washington, there is a joke that the difference between Republicans and Democrats is that Republicans try to win elections. If the Democrats don’t make fixing the drug benefit a top election priority in 2006, then the joke is on them once again.


Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, DC.