Regulatory Policy

Don’t Cut Seniors’ Drug Coverage to Fund Another Spending Spree

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Cutting Medicare payments for prescription drugs would hurt seniors and slow drug development in the process.

The Biden administration is reportedly contemplating major cuts in Medicare payments for prescription drugs to fund another enormous omnibus spending bill. Yet drug prices paid by Medicare have risen less than the general rate of inflation over the past decade and represent some of the best value for money in American health care. Seniors’ anxiety over drug expenses reflects rising consumption levels and high out-of-pocket-cost requirements. Congress should fix the structure of Medicare’s prescription-drug benefit rather than raid the program in a way that would truncate the rewards for future drug development.

A year ago, the Congressional Budget Office projected a federal deficit of just over $1 trillion for 2020. Legislation intended to get Americans through COVID-19 has cost $5 trillion more, and the Biden administration is now considering an additional $3 trillion bill — pushing the year’s total spending spree above $25,000 per household.

To finance the new bill, the administration is contemplating rolling back much of the 2017 tax cuts and slashing payments for prescription drugs purchased by Medicare. House Democrats argue that Medicare is currently overpaying pharmaceutical manufacturers, whose prices have allegedly soared, and claim that existing payment rates serve only to facilitate stock buybacks by drug-makers.

As a newly released Manhattan Institute report demonstrates, these claims are off base. While list prices for some select drugs may have increased substantially, overall prices paid for drugs by Medicare increased by only 14 percent from 2006 to 2018, after accounting for the growing availability of generics — less than the 27 percent increase in the general Consumer Price Index over that period, and much less than the 51 percent increase in the price index for hospital services. Prescription drugs account for only 12 percent of U.S. health-care spending, a lower share than in most other developed countries.

The problem is rather that seniors are highly exposed to drug costs. While 15 percent of Medicare beneficiaries were hospitalized in 2015, 91 percent used prescription drugs. Whereas adults aged 25 to 34 filled an average of four prescriptions that year, those aged 65 to 74 filled 26. On average, drug consumption by Medicare beneficiaries ($2,254) in 2015 well exceeded that ($775) by those with private insurance.

Though the program did not cover prescription drugs at all during its first 40 years, Medicare drug coverage still falls short: Beneficiaries bear only 3 percent of hospital costs out-of-pocket but are required to pay for 18 percent of the cost of drugs. There is currently no cap on out-of-pocket costs that Medicare beneficiaries face for prescription drugs.

Unlike hospital care or physician services, drug utilization is not labor intensive, so it presents a tempting target for politicians looking for cuts that will not immediately lead to job losses. Yet despite the possibility of short-term savings, slashing drug reimbursements would come at the cost of diminished drug development in the long run.

The high cost of skimping on drug reimbursement has been made clear by the contrasting experience nations have faced with COVID-19 vaccine procurement. Last year, the United States was criticized for paying more than the European Union to purchase vaccines, but the payments assured a higher supply and faster roll-out — with just over 25 percent of the U.S. population having now received at least a first dose, in contrast with 9 percent in the E.U. Israel, which paid most of all, has now been able to vaccinate the majority of its population, and seems likely to be the first nation to return to normal life after suffering a full outbreak.

The cost of new drugs may seem high when quoted in isolation, but the value of adequate rewards for the development of innovative therapies is clear when viewed in the context of treatments that it displaces. For instance, the initial $84,000 cost of Sovaldi, which cures hepatitis C, is dwarfed by that of a liver transplant — which costs an average of $577,000, falls short of a cure, and is prone to complications.

Speaker Pelosi acknowledges the shortcomings of the existing Medicare drug benefit and has called for a $2,000 cap on annual out-of-pocket drug costs. Congress would certainly do better to strengthen Medicare’s drug coverage in this way, rather than raid it to fund a spending spree. Legislators could easily pay for such a reform, without imposing additional costs on taxpayers, by shifting some out-of-pocket costs from prescription drugs to physician services.


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