Small Government and the Medicare Drug Benefit

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Dean Baker
Truthout, Feb. 27, 2007

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The pundits tell the public that the main split between conservatives and liberals is that conservatives favor small government and want to leave as much as possible to the market. By contrast, liberals believe that the government has to play an active role to ensure that basic needs are met and to limit inequality.

This is a great way to describe political reality if you're a right-winger and you want the government to continue policies that cause income to be redistributed upwards. It's a very good strategy to pretend that the upward redistribution of income is just the natural workings of the market. On the other hand, it is truly remarkable that so many liberals/progressives are prepared to embrace the conservative framing of political debates, since it bears so little relationship to reality.

The Medicare prescription drug benefit provides a great example of the small-government conservative hypocrisy in action. The Republican Congress passed a Medicare drug bill that cost almost twice as much as necessary. There were two reasons for the excess cost.

First, Congress required that the benefit be administered by private insurers, rather than just being added onto the traditional Medicare program. The administrative costs of Medicare are far lower than those of private insurers. Medicare doesn't have to engage in marketing, it doesn't have to pay multimillion-dollar salaries to top executives and it doesn't have to pay out dividends to shareholders. The Congressional Budget Office estimates that the decision to have the program administered by private insurers added close to $5 billion a year to the cost of the program.

The second reason that the program costs more than necessary is that Congress prohibited Medicare from using its marketing power to bargain down prices charged by the pharmaceutical industry. As a result, Medicare is paying prices more than 60 percent higher than those paid by the Veterans Administration, the Canadian government, and other governments that bargain effectively with the drug industry.

Since there has been a great deal of nonsense spread about the implications of government-negotiated prices, it's worth making a couple of points.

First, in a system with a formulary of preferred drugs, such as the one run by the Veterans Administration, patients can and often do get drugs not on the formulary. It's just necessary for their doctors to specifically request the drug.

Second, even if a drug is not obtainable through a Medicare benefit, patients could still buy it on their own. Since there would be large savings on drugs purchased through the formulary, it is extremely unlikely that any patient would be worse off than under the current system, even if one in a thousand might occasionally have to buy a drug not covered by the program.

Finally, it is important to remember that the Medicare benefit itself is 100 percent optional. Anyone who believes that it will not help them because it won't cover needed drugs is entirely free not to sign up for the benefit. In short, the idea that having Medicare negotiate prices with the industry would somehow deny anyone needed drugs, to which they would otherwise have access, is complete nonsense. This is simply a myth invented by supporters of the waste in the current Medicare benefit.

Genuine small-government conservatives should be demanding that the Medicare drug benefit be reformed to eliminate these excess costs. Remember, every additional dollar spent on the Medicare drug benefit is another dollar that big government must extract in taxes from the private sector. Conservatives who want to minimize tax burdens, or make government small enough to drown in a bathtub, should want to minimize the cost of government programs.

Of course, most of the "small-government conservatives" are ardent defenders of the Republican Medicare drug benefit. They are happy to have big government waste taxpayer dollars when those dollars go to the insurance and pharmaceutical industries.

This is an important lesson. There is no issue of small government versus big government. The issue is whether government exists to ensure the security and well-being of the bulk of the population or to redistribute income to those at the top. When government funds are flowing to the wealthy, small-government conservatives have no objection to very big government.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.