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Home Publications Blogs Beat the Press The Main Reason Medicare Part D Cost Less than Expected Is the Drug Companies Stopped Innovating

The Main Reason Medicare Part D Cost Less than Expected Is the Drug Companies Stopped Innovating

Thursday, 14 March 2013 07:22

Paul Howard celebrates the lower than projected cost of the Medicare prescription drug program and attributes it to the role of private insurers. In fact, the main reason that Part D has cost less than projected is that the rate of increase in drug prices overall has been far less than projected. This in turn is attributable to a sharp fall in the number of breakthrough drugs.

If Howard wants to blame the collapse of innovation on the use of private insurers to deliver the Medicare drug benefit then he may have a case that the private insurers were central to controlling costs. Otherwise, he's killing electrons for nothing.


Thanks to Robert Salzberg for calling this one to my attention.

Comments (2)Add Comment
written by Chris Engel, March 14, 2013 8:01
Dr. Baker,

I've read through the report you compiled on the misperception of the driver of lower cost of Part D being lack of innovation rather than increased private competition leading to lower prices.

My question is, to what extent is the overpayment for drugs in the United States a hidden subsidy for American businesses (big pharma)?

I realize there are also European pharma companies, but they have a production presence in the United States as well. So is this overpayment really just a way to cushion profits of American multinationals in order to buttress welfare our industry/people?

It seems it would be almost impossible to determine where the geographic benefits of all the Part D payouts are, but just a thought that maybe these kinds of policies that lead to overpayment to the likes of Big Pharma are similar to the hidden subsidies we give to, for example, Boeing.
Why Conservatives Like "Competition": Because It Drives Up Costs for Others
written by Last Mover, March 14, 2013 12:04
From Bloomberg:

Conservatives like Part D because private plans bargain with drug companies over prices and then compete with one another for senior citizens’ business. Lower premiums attract more enrollees, leading to more profits for insurers and lower costs for taxpayers. Competition and consumer choice help keep costs down.

Among the whoppers tossed around so glibly in this article by Paul Howard, this one tops the list. At least he could have admitted that at the time it was passed, Medicare Part D was projected to add $16T to the debt over the next 75 years.

When changing Medicare to include prescription drugs provided by the private sector, the first priority was to block the government from negotiating for drugs based on its huge buying power, exactly the necessary economic countervailing market power to go up against Big Pharma, the closest thing to a level playing field given the conditions.

That set up a very high price ceiling for all drugs, known more generally as MSRP, under which all other prices can be falsely characterized as "discounts" achieved through "competition" while still extracting huge amounts of economic rent far above the true economic cost at the margin as explained by Dean Baker many times.

That's why conservatives like Part D. Not because it's competitive, but because it's virulently anti-competitive, specifically designed to exist under the extortion umbrella of full retail prices forced to be paid by the government that includes forced subsidies to private insurers and providers for drugs.

Talk about mooching off government in the name of competition, Paul Howard and friends are welfare queens extraordinaire when it comes to health care and drugs.

It's no different than rigging a game in sports by doping, or bribing the opposing side to intentionally lose points and score low, then strut around as "winners" bragging what effective "competitors" they were on a "level playing field".

As Dean Baker says, the drug prices were the cause of lower costs and came down because the monopoly wall of blockbuster drugs cracked open a little as other legacy drugs went generic - not because private insurers "competed" them down.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.