As Congress grapples with how to best provide a drug benefit for seniors, affordability and needed reform are taking it on the chin. Many Democrats and a few Republicans have not come to terms with the extraordinary financial burden a government-only Medicare drug benefit would place on the nation and future generations. Instead of fixing Medicare by adding and bolstering market mechanisms to reduce costs and encourage innovation, Congress and President Bush may end up adding expensive benefits, increasing government control and hobbling competitive forces.
Moreover, some politicians have set their sights on dangerous changes, including new rules and regulations that will threaten some of the technological and competitive successes of the current health-care system. If not corrected, the changes may make the American health care system look more like the Canadian and European systems, which aggressively ration drugs and services.
Medicare is the pay-as-you-go system by which current workers pay taxes to support the care of seniors. The system, which is overseen by a giant Washington bureaucracy, faces a significant crisis.
My colleague at the American Enterprise Institute, Joseph Antos, recently told Congress, “The impending retirement of 78 million baby-boomers, beginning in just eight years, will rapidly escalate demands on Medicare’s finances.”
Even without the proposed changes, future Medicare payments will outstrip tax receipts by $36.6 trillion, according to a new study by Jagadeesh Gokhale, a senior economic advisor at the Federal Reserve Bank of Cleveland, and Kent Smetters, an assistant professor at the University of Pennsylvania. That compares with a Social Security shortfall of a mere $7 trillion.
Now, on top of the current Medicare system, Congress and the president want to add a drug benefit. That makes sense. When Medicare was first conceived 40 yeas ago, the use of pharmaceuticals to treat serious conditions like heart disease wasn’t nearly as widespread as it is today. As Antos and Grace-Marie Turner, president of the Galen Institute, wrote in a recent paper on the subject, “Prescription drug coverage should be integrated into Medicare’s benefits. There has been a revolution in our ability to treat illnesses through the development of effective pharmaceuticals — true wonder drugs that can extend and improve the lives of millions.”
Faced with a Medicare system on the verge of bankruptcy, the Bush White House wisely saw this need for a new benefit as an opportunity to reform Medicare. The president said he would agree to a drug benefit, but only if serious market-based reforms designed to make Medicare more efficient and less costly were included. The benefit was the carrot that would be used to encourage reform.
But Democrats and some Republicans have balked at the deal, and the bill that emerges from a conference between the House and Senate could end up with reform measures gutted. The Washington Post editorial page recently suggested that the final bill could be worse than the status quo. We risk getting “a piece of legislation that seems to be oblivious to its long-term consequences,” the Post wrote.
That’s a bleak picture. But there is hope. Congress knows exactly where to look to solve the Medicare problem: Its own backyard.
Members of Congress and their staffs get terrific health care through what is called the Federal Employees Health Benefits Program. The FEHBP keeps costs under control through competition and choice. Market mechanisms are good enough for federal workers. Why not for the rest of Americans?
In testimony before a Senate committee in May, Antos told members, “A Medicare reform modeled after FEHBP would provide both the incentive and the opportunity for seniors to choose health plans that best meet their needs. Beneficiaries would be able to select from competing plans, including a modernized fee-for-service Medicare that offers a sensible set of benefits. Such a reform would also create incentives for health care providers to produce high quality care at lower cost. Medicare would remain a government-run program under an FEHBP approach, assuring appropriate oversight and protection for the most vulnerable.”
The best example of how the high-quality/lower-cost nexus makes FEHBP such a success is the program’s use of pharmacy benefit managers (PBMs).
According to Government Executive magazine, PBMs emerged in response to the growing demand for prescription drugs and concerns over rising costs. PBMs “negotiate drug prices on behalf of the health plans, process claims and provide additional administrative support.” Currently, the 70 PBMs manage about four-fifths of all prescription-drug expenditures.
The industry is fiercely competitive. AdvancePCS covers the most lives, with 75 million, followed closely by Medco at 66 million and ExpressScripts at 58 million. Other large PBMs include Caremark Rx, WellPoint Pharmacy Management, and Pharmacy Services Group.
But do PBMs work? The General Accounting Office, the watchdog arm of Congress, was asked to look into PBMs to see if they helped consumers and if they kept costs down. The answer? A resounding “yes.”
Said the report:
Most federal employees, retirees, and their dependents participating in the Federal Employees Health Benefits Program … are enrolled in plans that contract with pharmacy benefit managers (PBM) to administer their prescription drug benefits. … The PBMs reviewed produced savings for health plans participating in FEHBP by obtaining drug price discounts from retail pharmacies and dispensing drugs at lower costs through mail-order pharmacies, passing on certain manufacturer rebates to the plans, and operating drug utilization control programs. For example, the average price PBMs obtained from retail pharmacies for 14 brand name drugs was about 18 percent below the average price paid by customers without third-party coverage.
And according to a new study by Health PolicyAlternatives, Inc.,
Over the last 30 years, PBMs have made significant investments in the technology necessary to safely and efficiently process pharmacy claims and have developed considerable expertise in techniques that produce value in the pharmaceutical component of the health delivery system … Using sophisticated computer and data analysis systems, PBMs adjudicate drug claims almost instantly and with high rates of accuracy.
The use of technology and competitive pressures has made the PBM sector a significant provider of health-care services. But as costs go down does quality of service suffer? Not according to the GAO:
Enrollees in the plans reviewed had wide access to retail pharmacies, coverage of most drugs, and benefited from cost savings generated by the PBMs. Enrollees typically paid lower out-of-pocket costs for prescriptions filled through mail-order pharmacies and benefited from other savings that reduced plans’ costs and therefore helped to lessen rising premiums.
Contrast this conclusion with the situation that prevails in countries like Canada, where the government actively discourages the introduction of new drugs. A study by the Lewin Group found “limitations in access to covered pharmaceuticals” and “delays in coverage and reimbursement for new, innovative pharmaceuticals.” On average, Canadian drug approvals take 313 days longer than they do in the United States — the better, it seems, to hold down costs for the national health system but, meanwhile, damaging the health of Canada’s citizens.
Indeed, delays and denials are a hallmark of the Canadian and European systems. A 1998 study found that Canadians waited an average of 150 days for an MRI, compared with three days for Americans. A total knee replacement required a wait of six months in Canada and less than four weeks in the U.S.
Unfortunately, some members of Congress can’t see a good thing when it stares them in the face. Instead of expanding the market mechanisms responsible for the success of the federal health benefits program, they want to start putting new restrictions and regulations on PBMs, threatening what are arguably America’s most innovative health-service providers.
Several provisions in the Medicare legislation would interfere with PBMs’ ability to negotiate price concessions.
For example, “disclosure” measures would impose an unprecedented requirement that PBMs routinely divulge to the anti-trust division of the Department of Justice and Office of Inspector General of HHS the details of their most confidential business contracts with manufacturers and pharmacies. Such information could easily become public, and the manufacturers would become reluctant to extend their best prices to any PBM for fear that would force them to extend such prices to all PBMs.
Also, “any willing provider” provisions would undermine the ability of PBMs to negotiate discounts with retail pharmacies by mandating that any retailer can join a network. What incentive would a pharmacy have to offer the best price if any other pharmacy can simply match the negotiated terms?
There are other, similar abominations in the bill — measures that reveal a lack of understanding of the economics of health care. In fact, of economics, period. Restricting competition through government rules does not lower prices and increase quality. To the contrary.
The PBM sector has quietly made huge investments in technology. But the Medicare provisions would discourage such capital expenditures in the future.
Politicians may be properly worried about rising health-care costs, but their solution heads in precisely the wrong direction. Instead of trying to control prices through regulation and bureaucratic dictates, they should trust the forces of competition and choice that have produced an economy that is the envy of the world. They should also remember the absurdity of looking at costs without considering benefits. A recent study by Frank R. Lichtenberg of Columbia University found that new-drug launches have increased the average worldwide lifespan by about three weeks per year since 1986. Because the average includes people not taking drugs, the benefits are even greater in countries like the United States, where the use of pharmaceuticals is widespread.
But all that could change if Congress keeps moving toward re-making the U.S. health care system in the image of places like Canada and Germany.
— James K. Glassman is a fellow at the American Enterprise Institute and host of TechCentralStation.com.