approach to paying for medical care that tends to encourage more, but not necessarily better, care. In dozens of ways, the cost problem is exacerbated by the way that the government goes about paying for health care.
Consider just one example. Before Congress expanded Medicare to cover prescription drugs in 2003, the most impoverishedof the elderly—about 16 percent of the aged—got drug coverage through Medicaid, the joint state and federal government health insurance program for the poor. By law, pharmaceutical companies must charge Medicaid the lower of “the best price” they charge anyone for a drug, or a price 15 percent below a benchmark. That saves Medicaid a lot of money.
In 2003, however, Congress ended that practice. It shifted those low-income elderly whose pharmacy bills have been covered by Medicaid coverage to the new Medicare pharmaceutical program. But, reflecting the enthusiasm for markets over government, the new program was somewhat different.Under the new system, the elderly purchase drug insurance at government-subsidized prices from one of several competing private plans, and then the insurers—not the government—pay the drug tab. For low-income elderly, the change didn’t cost them much; the government still picks up nearly all the cost. They account for about 40 percent of the people in the drug program, but because they tend to have multiple chronic conditions, they account for 56 percent of the program’s current spending.
One aspect of this shift from one government drug plan to another turned out to be a boon for Big Pharma, as major drug companies are known, but expensive for taxpayers. The “best price” rule no longer applied. Drug insurers, the theory went, would negotiate with the drug companies and keep drug costs down. In general, this competition has worked better than naysayers expected. But for low-income elderly, the law put a lot ofrestraints on the insurance companies. They had, for instance, to cover every available drug for certain conditions for these beneficiaries. That limited their negotiating power with the drug companies and, thus, boosted the cost of the insurance. The bottom line: the government ended up paying more for drugs for the elderly poor than it did under the old system. How much more? That’s confidential. A couple of Harvard economists dissected drug corporation financial statements and estimated that for one big drug company, this single feature of the Medicare drug insurance program increased revenues by 8 percent in 2006 over the previous year.The White House budget office estimates that reimposing the “best price” rule on drugs used by low-income elderly would save the government $155 billion over ten years. An open question: Would that come out of drug-company profits or would the companies simply raise prices on other drugs to compensate or cut back on research?
FEEDING THE FARMERS—AND THE KIDS
Although retirement and health care are among the very biggest federal programs, about 17 cents of every federal tax dollar goes to a wide range of other benefits, from veterans’ benefits to farm subsidies. These diverse financial arrangements have one thing in common: at the end of the pipeline is some American who is getting a check or a promise. Most are convinced they deserve the money.
The federal government has been sending checks to farmers, in good times and bad, for eighty years. This began with a disastrous drop in farm prices in the late 1920s and the 1930s that prompted Herbert Hoover and Franklin Roosevelt to use government muscle and taxpayer money to boost farm prices—a supposedly temporary measure. The political appeal was obvious: more than 20 percent of the labor force at that time worked on farms and more than 40 percent of Americans lived in a rural area. Eighty years later, fewer than 2 percent of Americans make their living on the farm, and not even one in six lives in a rural area. Yet big farms have considerable clout
Consider just one example. Before Congress expanded Medicare to cover prescription drugs in 2003, the most impoverishedof the elderly—about 16 percent of the aged—got drug coverage through Medicaid, the joint state and federal government health insurance program for the poor. By law, pharmaceutical companies must charge Medicaid the lower of “the best price” they charge anyone for a drug, or a price 15 percent below a benchmark. That saves Medicaid a lot of money.
In 2003, however, Congress ended that practice. It shifted those low-income elderly whose pharmacy bills have been covered by Medicaid coverage to the new Medicare pharmaceutical program. But, reflecting the enthusiasm for markets over government, the new program was somewhat different.Under the new system, the elderly purchase drug insurance at government-subsidized prices from one of several competing private plans, and then the insurers—not the government—pay the drug tab. For low-income elderly, the change didn’t cost them much; the government still picks up nearly all the cost. They account for about 40 percent of the people in the drug program, but because they tend to have multiple chronic conditions, they account for 56 percent of the program’s current spending.
One aspect of this shift from one government drug plan to another turned out to be a boon for Big Pharma, as major drug companies are known, but expensive for taxpayers. The “best price” rule no longer applied. Drug insurers, the theory went, would negotiate with the drug companies and keep drug costs down. In general, this competition has worked better than naysayers expected. But for low-income elderly, the law put a lot ofrestraints on the insurance companies. They had, for instance, to cover every available drug for certain conditions for these beneficiaries. That limited their negotiating power with the drug companies and, thus, boosted the cost of the insurance. The bottom line: the government ended up paying more for drugs for the elderly poor than it did under the old system. How much more? That’s confidential. A couple of Harvard economists dissected drug corporation financial statements and estimated that for one big drug company, this single feature of the Medicare drug insurance program increased revenues by 8 percent in 2006 over the previous year.The White House budget office estimates that reimposing the “best price” rule on drugs used by low-income elderly would save the government $155 billion over ten years. An open question: Would that come out of drug-company profits or would the companies simply raise prices on other drugs to compensate or cut back on research?
FEEDING THE FARMERS—AND THE KIDS
Although retirement and health care are among the very biggest federal programs, about 17 cents of every federal tax dollar goes to a wide range of other benefits, from veterans’ benefits to farm subsidies. These diverse financial arrangements have one thing in common: at the end of the pipeline is some American who is getting a check or a promise. Most are convinced they deserve the money.
The federal government has been sending checks to farmers, in good times and bad, for eighty years. This began with a disastrous drop in farm prices in the late 1920s and the 1930s that prompted Herbert Hoover and Franklin Roosevelt to use government muscle and taxpayer money to boost farm prices—a supposedly temporary measure. The political appeal was obvious: more than 20 percent of the labor force at that time worked on farms and more than 40 percent of Americans lived in a rural area. Eighty years later, fewer than 2 percent of Americans make their living on the farm, and not even one in six lives in a rural area. Yet big farms have considerable clout
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