David Brooks on Drugs and Medicare

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Tuesday, 09 October 2012 04:51

While we may not know whether David Brooks' try out as a Romney speechwriter was successful, he clearly is doing his best for the campaign. Today he pushes the idea that a voucher system is the only way to contain Medicare costs. This requires ignoring an awful lot of evidence, but that is an exercise at which David Brooks excels.

To start, in dismissing the idea that governments can be successful in designing policies that contain costs, Brooks ignores all the evidence from every other wealthy country. All of them have much greater involvement of the government in their health care system (in some countries like the United Kingdom and Denmark they actually run the system) yet their average cost per person is less than half as much as in the United States. And they have comparable health care outcomes, with all enjoying longer life expectancies. If health care costs in the United States were comparable to those in any other wealthy country we would be looking at long-term budget surpluses, not deficits. (We could look to trade to reduce costs, but policy debates in the United States are dominated by ardent protectionists in the area of health care.)

Of course relying on the private sector to contain costs in Medicare is not a new idea, contrary to what Brooks seems to believe. The Gingrich Congress' Medicare Plus Choice plan opened Medicare to private insurers as did President Bush's Medicare Advantage plan. Both raised costs. We also have the massive under 65 market which is overwhelmingly served by private insurers. Yet per person costs have consistently risen more rapidly for the non-Medicare population (Table 16) than for the Medicare population. This is in addition to the fact that the administrative costs as a share of expenses for Medicare are less than half of the costs for private insurers (this is even after adjusting for the higher denominator with the expenses of Medicare patients).  

Brooks seems to think it would be a great idea for providers to be paid by the patient rather than for the specific services provided. That may prove to be a very good idea and the Affordable Care Act actually puts in place a number of incentives to push providers into going this path. Most private insurers do not now follow this route in spite of Brooks' positive assessment of this approach. But Brooks still links this method of payment with private insurers.

In effect Brooks is arguing that if pointy headed government bureaucrats in Washington force private insurers to change the way that they provide benefits, then it will lead to lower costs than if we just left the market to itself. Brooks faith in the effectiveness of government intervention is impressive.

Interestingly, Brooks gives the voucher structure of the Medicare drug benefit credit for containing the costs of the program and holds it up as a model for Medicare more generally. In fact, the main reason that costs have been contained is that drug prices in general have risen much less rapidly than had been projected. In 2004, the Center for Medicare and Medicaid Services projected (Table 2) that we would be spending $440 billion in 2012 for prescription drugs. Instead we are now expected to spend $277.1 billion.

The slower growth in costs was in turn attributable to a slower pace of innovation in the drug industry. The Food and Drug Administration data put the number of breakthrough drugs developed in recent years at less than half the late 90s rate.(A priority approval means that a drug is seen as presented a qualitative advancement over existing drugs.) Perhaps Brooks wants to attribute the slowdown in innovation to the voucher system in the Medicare drug benefit.

annual-FDA-drug-approvals-08-2012

Source: FDA and Knowledge Ecology International.

Finally, the Romney-Ryan plan does contain an important potential contradiction in both setting up a strict limit on the rate of benefit cost growth and the commitment to guarantee a payment that is large enough to allow beneficiaries to buy a Medicare equivalent policy. If it turns out to be the case that even with the Romney-Ryan voucher system in place costs outpace the cost growth target, we don't know which will take precedence, the restriction on cost growth or the commitment to ensuring seniors that the government will pay for a Medicare equivalent policy.

In this way, the Romney-Ryan promise on Medicare is similar to the promise on their tax plan. They claim that they will not raise taxes on the middle class and still have a revenue neutral tax plan. As many independent analysts have pointed out, this story does not add up. Either they will have to not carry through on the tax plan that is at the center of their campaign, they will have to raise taxes on the middle class, or they will increase the deficit. Similarly, their plan for Medicare almost certainly means that they will either have to back away from their commitment to guaranteeing that seniors will be able to afford a Medicare equivalent policy or they are not really committed to the budget targets they have set out for Medicare.