Senior Citizens Will Pay Dearly For Health Care Price Controls

Squabbles over spending cuts have ruled the negotiations over increasing the debt ceiling. But even after the ink is dry on the budget deal just passed, lawmakers will still be charged with reducing federal spending further.

One proposal that refuses to die would impose price controls on prescription drugs in the Medicare Part D program. Sen. Jay Rockefeller (D-W.Va.) and Rep. Henry Waxman (D-Calif.) are the latest lawmakers to advocate such an approach.

Price controls may seem like a tempting way to save the government money on prescription drugs, but in reality, they’ll force seniors to pay more for the drugs they need — or worse, deprive them of access to critical medicines.

Some lawmakers have been complaining that pharmaceutical companies benefit from Medicare Part D while seniors have to choose between buying medicine and food since the drug benefit passed in 2003. As Senator Amy Klobuchar (D-Minn.) framed it in April 2007, “Congress has allowed the drug companies to charge excessive prices.”

Nevermind that Part D’s costs have been about 40 percent lower than the Congressional Budget Office’s (CBO) initial estimates. Or that Part D plans have negotiated rebates on brand-name prescription drugs of between 20 and 30 percent — which they’ve passed onto beneficiaries in the form of lower premiums.

Critics of the program believe that prices could still be lower.

They draw their inspiration from Medicaid. The federal government legally requires drugmakers to pay several rebates for drugs consumed by Medicaid patients. Experts estimate that the average rebate for a brand-name drug in 2011 reaches 40%.

Of course, a mandated 40-percent discount is larger than the 20% to 30% rebates that are the norm currently in Part D. CBO therefore projects that instituting Medicaid-style price controls in Part D for the low-income Americans eligible for both Medicare and Medicaid could save up to $112 billion over 10 years.

That begs an important question. If Medicaid is able to secure bigger rebates than Part D, wouldn’t both patients and the government benefit from extending Medicaid’s price controls to Medicare’s low-income beneficiaries, at the very least?

In a word, no. According to a new analysis from former CBO Director Douglas Holtz-Eakin and economist Michael Ramlet, instituting Medicaid-style rebates in Part D would drive beneficiaries’ monthly premiums up between 19.6% and 39.4%.

All told, Holtz-Eakin and Ramlet project that new rebates in Part D would increase seniors’ annual out-of-pocket drug costs by $1.5 to $3.7 billion. That translates to as much as $208.80 in additional costs for every senior — every year.

Why the huge increases? A phenomenon known as “cost-shifting.”

Drug manufacturers won’t just absorb the financial hit associated with paying higher rebates to the government. They’ll pass those costs along. So insurance plans participating in Part D will not be able to secure the rebates of 20-30 percent they’d received pre-price controls, as drug companies will have less room to negotiate.

Consequently, seniors will pay more for coverage.

Privately insured folks will similarly face higher prescription-drug prices, as manufacturers try to shore up their balance sheets.

Indeed, as Dr. Scott Gottlieb, an economist and practicing physician, stated in testimony before the Senate’s Special Committee on Aging, “Mandatory rebates create a strong incentive for companies to launch drugs at higher prices in anticipation of the payments that they will have to provide to the states and the federal government.”

In other words, the cost-savings associated with extending Medicaid-style price controls are entirely illusory — particularly if drug makers just raise prices before the new rebates go into effect.

Meanwhile, the evidence suggests the Part D as currently structured is actually lowering drug costs across the market. According to one recent study, average retail prices for non-Medicare patients are down 5.4% — yielding savings of about $2.6 billion per year.

As Gottlieb put it in his testimony, the “economic benefits of Part D’s competitive structure . . . spill over into the rest of the commercial market.”

Make no mistake — lawmakers must find ways to trim federal spending. But expanding Medicaid-style price controls into Part D will not deliver the savings promised. Instead, premiums will rise, benefits will fall, and seniors will bear costs far greater than any of Uncle Sam’s potential savings.

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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