Republican HillaryCare: The Medicare Drug Benefit’s Prescription for Perverse Incentives
Health Policy Prescriptions
By: John R. Graham
2.1.2006
The complexity and confusion of the Medicare Part D drug benefit, where the media focuses its attention, is actually a relatively insignificant part of the problem posed by the new entitlement, which accelerates a vicious circle of bad incentives for politicians, citizens, and providers. The Medicare drug benefit will make the U.S. government the payer for over one quarter of the country’s prescription drug supply. This makes the so-called “non-interference” clause, which prevents the government from interfering with price negotiations between drug makers and insurers, an extremely fragile protection from price controls. The political will to preserve it will diminish rapidly. As the pharmaceutical industry devolves into a regulated utility, the invention of new medicines will decline dramatically. Americans are receiving mixed signals from the government: on the one hand, it gives us control of more of our health dollars while we are working and privately insured (through tools like Health Savings Accounts); but on the other hand it tells us that we are “entitled,” out of the blue, to prescription drugs and other health goods and services almost for free when we retire and go on Medicare. This creates negative incentives for privately insured patients under 65 years old, increasing the likelihood that Health Savings Accounts (HSAs) will become simply retirement savings accounts for well off Americans. Insurers do not have good incentives to spend the appropriate amount of money on prescription drugs. Instead, Medicare establishes a “silo” approach that forces insurers to consider only one area of health spending, to patients’ detriment. Drug makers are losing the incentive to offer their own discount programs to low-income seniors, now that the government has taken them over. The “bidding” element of the drug benefit is its sole positive attribute, and it should be extended throughout Medicare as an interim reform. However, executing this will require extraordinary political will, which is extremely unlikely in the current climate of public opinion.
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