Part D Price Controls Kill Jobs

Washington faces two pressing tasks — getting a handle on escalating federal debt and addressing the country’s unemployment crisis. Unfortunately, the White House, thanks to its usual ideological blinders, has come up with a plan that will actually cost jobs — even as it achieves only trifling savings.

The proposal, which Team Obama has now forwarded to the supercommittee charged with coming up with $1.6 trillion in savings over the next decade, is to extend Medicaid-style manufacturers’ rebates to part of the Medicare Part D program. The proposal affects the so-called “dual eligibles,” those eligible for Medicaid but who obtain their prescription coverage through Medicare Part D.

These “rebates” don’t go to patients; the government collects them. In reality, they are nothing more than price controls. By doing this, the Obama administration hopes to save $135 billion over a decade. But that’s just another way of saying it wants to squeeze $135 billion over 10 years out of the pharmaceutical industry, a shining example of growth in an otherwise bleak economic landscape.

It’s foolish to think drug companies will respond to the revenue reduction by striking up “Hail to the Chief” and going on with business as usual. There will be adverse consequences for employment, as drug companies make painful cuts, and research and development into new treatments for such diseases as Alzheimer’s and cancer also take a hit.

America is mired in economic stagnation — unemployment remains stuck at 9%, and growth is slow at best. Despite this, the pharmaceutical sector continues to create and support high-quality jobs.

Between 1996 and 2006, this industry added jobs at a rate of 3.1% a year — more than twice as fast as the rest of the economy. By 2009, more than 674,000 Americans were employed in the pharmaceutical sector. In an impressive ripple effect, each of these jobs in turn supported an additional 3.7 workers. All-in-all, that’s 3.4 million American jobs, desirable jobs with competitive salaries. The average income of a drug industry employee was $118,690 in 2009 — significantly higher than the national average.

The Battelle Technology Partnership Practice ran a simulation that found that if the biopharmaceutical sector saw annual revenue reductions of $20 billion, 260,000 of these high-value jobs would be lost. That’s the order of magnitude of the hit the industry would take if the Obama proposal became law. And of course there’s the personal toll for the many Americans who rely on their Medicare prescription drug plan for access to life-saving medications.

The unique Medicare Part D structure fosters competition between private insurers, who compete with each other to attract enrollees. Harnessing these market forces maintains the low prices and wide coverage subscribers currently enjoy.

In 2012 subscribers will pay premiums of just $30 a month — 44% lower than the rates originally projected by the Congressional Budget Office (CBO) before the program took effect in 2004.

Imposing rebates on drugs sold to low-income beneficiaries will disrupt this market chemistry. The CBO estimates that rebates will cause Part D premiums to increase by 5% immediately and to be 20% higher than they otherwise would be over the course of ten years.

What’s more, across Medicare, Part D saves $12 billion annually by keeping subscribers healthy. A study in the Journal of the American Medical Association found that access to affordable Part D drug plans increases adherence to treatment regimens. This in turn diminishes the need for costly inpatient care, such as nursing home admittances and hospital visits.

In short, Medicare Part D financing as it stands today is serving recipients at lower-than-expected costs, saving taxpayers money, and supporting industry research into cutting- edge treatments. And the Obama response is: Change all that? Yes, we can!

Washington claims it is committed to putting Americans back to work and the country back on the path of fiscal responsibility. The economic potency of the pharmaceutical industry proves these ambitions need not be mutually exclusive — it is possible to create high-quality jobs and conserve federal funds.

Obama’s proposed rebates, however, accomplish neither task. For the sake of an anemic American economy, lawmakers must look elsewhere for budget cuts and leave Medicare Part D alone.


Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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