July 19 2002


Prescription Drugs: Big Government vs. Really Big Government

by Raymond J. Keating

Prescription drug coverage under Medicare once again has become the hot topic in our nation’s capital. Unfortunately, consumers, small businesses and the pharmaceutical industry will lose no matter who wins this latest battle between Republicans and Democrats.

Republicans in the U.S. House of Representatives, with the support of President Bush, have put forth a big government drug proposal, while Democrats support a really big government plan.

The House Republican plan, passed in late June, carries a projected price tag of about $350 billion over ten years, with taxpayers subsidizing private insurers that would run the program. It would feature a $33 monthly premium, a $250 annual deductible, and a $3,700 cap on out-of-pocket payments. Taxpayers would be on the hook for 80% of drug costs up to the first $1,000, and 50% on the next thousand dollars, and 100% beyond the $3,700 cap. Low-income seniors - a sizeable group since by definition retirees don’t earn much money - would have either no co-payments and deductibles, or pay reduced rates according to their income levels.

As for the Democrats, their various plans carry price tags ranging from $500 billion to $1 trillion over the next decade. Co-payments would be lower than under the GOP plan. Deductibles would be smaller or simply not exist. And taxpayers would be on the hook for a bigger chunk of the prescription drug tab.

Unfortunately, the actual costs of both these plans will be much higher than what is being estimated today. Recall that when Medicare was established in the mid-1960s, costs for Medicare’s hospital insurance were projected to be $9.1 billion in 1990. The actual costs in that year were more than seven times higher at $67.1 billion.

When the government picks up the tab for a health care service, the consumer and the provider have no reason to be concerned about costs. For good measure, no one inside government has any incentive to control costs either.

The federal government’s foray into prescription drug coverage and subsidies has completely predictable results. Allow me to tell the story of how this promises to play out.

With government coverage, utilization will jump. Increased demand will translate into higher costs and more spending. Higher demand and prices will affect the entire drug market, raising prices for all consumers and boosting health care premiums paid by employers offering drug coverage to their employees. Seeking more votes, politicians will broaden prescription drug coverage and force taxpayers to pick up a bigger share of the bill.

Facing ever-mounting costs, the idea of cutting benefits or increasing premiums will be a political non-starter. So, the government will begin to ration prescription drug care, and price controls will be imposed. Indeed, once the politician’s nose is under the tent with the passage of Medicare prescription drug coverage, price controls become inevitable - not a question of “If?” but “When?”

But what about the fact that the House GOP plan specifically says that the government cannot set prices? Well, the law creating Medicare in 1965 said the same thing, but Medicare imposes all sorts of controls on coverage and payments today.

Price controls would do extreme damage to the U.S. pharmaceutical industry. In particular, it would cripple the critical and costly research and development that these companies undertake in the pursuit of new and improved prescription drugs. That means fewer cures and treatments will be discovered and developed over the long haul.

Rather than creating a new and dangerous entitlement, if politicians are truly concerned about prescription drug costs and coverage, then they should seek out positive, market-based reforms. For example, deregulation and tax relief make sense in order to reduce costs and boost investment and saving incentives.

Also, making tax-free medical savings accounts (MSAs) available to all health care consumers would expand choices and competition in the marketplace. With MSA/catastrophic insurance coverage, consumers and their health providers call the shots regarding treatment, including prescription drugs; they have incentives to watch costs; and are insured against large, unforeseen medical expenses.

Let’s hope that the disagreements and political posturing between Democrats and Republicans on Medicare prescription drug coverage derails the big government efforts, and that pro-market reforms eventually carry the day.

Raymond J. Keating is chief economist for the Small Business Survival Committee, a national non-profit advocacy group for small businesses. For more information, visit the SBSC’s website at www.sbsc.org

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