Will the Democrats Cut and Run on the Medicare Drug Bill?

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Dean Baker
Truthout, November 29, 2006

It takes courage for politicians to fight powerful special-interest rate groups. The reform of the Medicare prescription drug benefit will provide a clear test as to whether the Democratic Congressional leadership has enough backbone to stand up for the public good and follow through on one of its most important campaign promises.

The basic story here is simple. When the Republican-controlled Congress passed the Medicare prescription drug benefit in 2003, it deliberately structured the benefit so as to ensure that the drug industry and the insurance industry would be able to profit at the expense of beneficiaries and taxpayers. They wrote the law so that onlyprivate insurers would be able to offer the drug benefit; Medicare was prohibiting from offering its own plan. Eliminating competition from Medicare guaranteed the insurance industry a piece of the action and raised the cost of the program by almost 10 percent, according to estimates from the Congressional Budget Office.

Congress also explicitly prohibited Medicare from directly negotiating prices with the pharmaceutical industry. Given Medicare's enormous potential buying power, it surely would have been able to negotiate prices that are comparable to those paid by the Veterans Administration (VA) or the Canadian government. These prices average 50 to 60 percent of the prices paid to insurers under the Medicare drug plan. If the Medicare drug plan paid the same prices for drugs as the VA, it would be possible to eliminate the $2,850 "doughnut hole" gap in coverage and still have large savings left over for taxpayers.

There was no reason to design the drug benefit in this way, except to benefit the insurance industry and the pharmaceutical industry. Several of the members of Congress and administration officials most directly involved in the design of the benefit and getting the bill through Congress have since been rewarded with lucrative positions with these industries. The most obvious example of such a payoff went to Louisiana Congressman Billy Tauzin, who as chair of the House Energy and Commerce Committee played a key role in getting an industry-friendly bill to the floor of the House. Just over a year later he left Congress and became head of PhRMA, the pharmaceutical industry's trade association.

Now that the Democrats are in control of Congress, they have a chance to reform the Medicare drug bill, making it simpler and cheaper. This is exactly what the party leadership committed itself to doing during the campaign. However, there have been numerous reports that it intends to back away from this commitment. For example, there has been discussion of the possibility of just removing the phrase in the law that prohibits Medicare from negotiating with the drug industry, but not setting up any mechanism that would allow for meaningful negotiation.

There are also reports that Max Baucus, who will chair the Finance Committee in the Senate, wants to hold hearings on how best to deal with the bill. This would be comparable to holding hearings after December 7, 1941, to determine who had attacked the United States at Pearl Harbor.

We already know what needs to be done: Medicare should be allowed to offer its own plan as an add-on to the existing program. Free-standing prescription drug programs don't exist in the private sector; the Republican Congress invented this animal as a way to put money in their friends' pockets and to undermine the traditional Medicare program. The Democrats promised to fix this travesty in their election campaign. The question now is whether they have the backbone to follow through on their promise. If they don't, it won't just be Republicans who call them "Defeatocrats" in the next election campaign.


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.