Friday, September 08, 2006

Medicare Drugs

Medicare Drugs and the Free Market
By Dean Baker
t r u t h o u t | Perspective

Wednesday 06 September 2006

According to conservative mythology, the private sector is full of innovative, energetic people. By contrast, the public sector is filled with lazy, incompetent bureaucrats. This is why they tell us that we should transfer as many government services as possible to the private sector.

The greater efficiency of the private sector was the argument that Republicans in Congress gave when they decided to have the Medicare prescription drug benefit provided exclusively through private insurers. They argued that the private sector would be more effective in providing the new benefit than the existing Medicare bureaucracy.

They made this argument in spite of the fact that the Congressional Budget Office (CBO) estimated that the administrative costs of private insurers would add nearly $5 billion a year (approximately 9 percent) to the cost of the program. Republicans in Congress argued for the superiority of private insurers even when CBO projected that they would pay 60-80 percent more for prescription drugs than a government agency like the Veterans Administration.

Millions of seniors have had to deal with the consequences of the Republican drug bill in its first year of implementation. First, there were hundreds of thousands of seniors who fell through the cracks as their drug coverage switched from Medicaid to private insurers at the beginning of the year. Many states jumped in with money and staff to ensure that these people were able to get access to essential medications. Many pharmacists helped out as well, in some cases disbursing prescriptions when they had no guarantee of reimbursement.

Tens of millions of seniors then had to cope with the confusing details of dozens of competing insurance plans that offered differing schedules of co-payments, premiums, and gaps in coverage. According to a survey done by a Medicare advisory board, this selection process took a typical beneficiary 8 hours. People with extensive drug needs, who may also have had difficulty reading and understanding the forms, could take considerably more time, unless they were lucky enough to have help from family or friends.

Now, many of the seniors with the greatest drug needs are falling into the infamous "doughnut hole," a $2,850 gap in coverage that was put into the benefit in order to save money. Once seniors cross a spending threshold ($2,250 for the year), their drug coverage disappears, even though they are still paying a monthly premium. Seniors will be left paying their full drug expenses, unless the total bill crosses $5,100, at which point the insurance would then kick back in. In most cases, seniors are likely to first become aware that they are in the doughnut hole gap when the pharmacist tells them that they have to pay $100-$200 for a prescription, not a $10 co-payment.

If Congress had opted to have the drug plan provided through the existing Medicare system, this doughnut hole would have been unnecessary. The savings from lower administrative costs and lower drug prices would have been enough to eliminate the doughnut hole, and still save the government money.

But, this is not just history. Congress can still fix the benefit. The route is simple. The Republicans can just put their self-proclaimed belief in the superiority of the private sector to a market test. They just have to alter the drug bill to give Medicare beneficiaries one additional choice, a drug plan offered through the Medicare system. This plan would negotiate price discounts directly with the drug companies. It would then pass these savings, along with the savings from lower administrative costs, on to beneficiaries.

If Republicans believe in the superiority of the private sector, then there should be little to fear from a Medicare-sponsored plan. According to their self-proclaimed world view, a Medicare-run plan would quickly be driven out by dynamic private firms. But the fact is, the Republicans have thus far been unwilling to offer people the choice of a Medicare-run plan.

They may try to invent excuses, but the bottom line is that they don't believe their own ideology. The Republicans know that their family, friends, and financial backers in the insurance industry would lose out in the free market, and therefore they will not give Medicare the opportunity to compete. They are not believers in the free market - they are old fashioned protectionists who want to use the powers of government to help their friends. It's that simple.

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 ( 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.


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