Lessons from Medicare on drug spending

A new government study forecasts that America’s health care spending will almost double by 2016. Assuming prices don’t drop, health care will account for nearly 20 percent of the U.S. economy within the decade, and taxpayers will shoulder nearly half that burden—not an encouraging outlook.

But there was also some encouraging news in the study, which was released by the Department of Health and Human Services: The growth in national spending on prescription medicines is slowing. And it’s a direct result of the new Medicare drug benefit.

Here’s why: Unlike traditional, government-run programs, Part D is largely administered by private-sector companies, which must compete for the business of America’s seniors. As such, the only way for these companies to stay in business and gain new customers is to offer better choices and lower prices than their competitors.

This has also resulted in more choices than seniors would have had under a traditional government program. No one denies that Medicare Part D has its fair share of problems. I’ve been—and remain—an outspoken critic of the program because as designed, it is a fiscally unsustainable, vast over-expansion of government.

But it’s difficult to ignore the successes of private-sector involvement in Part D. In fact, that’s the one area where the program has been truly successful—pushing prices down and quality up. Indeed, the private-sector, consumer-driven aspects of the program offer insights on how the program should be overhauled, but that is a topic for another column.

Unfortunately, some opponents of the program want to ignore these successes and strip competition and choice from Part D. They want the benefit to be entirely government run. So they’re pushing to remodel it after a traditional government program, like the drug benefit offered by the Department of Veterans Affairs.

While this would vastly expand government’s role in our health care system, it would not be good for America’s seniors. Under the V.A. benefit, veterans’ access to drugs is greatly restricted thanks to a “National Formulary” that was instituted to hold down prices.

Only 19 percent of drugs approved by the Food and Drug Administration since 2000 are included on the formulary, and only 38 percent of drugs approved in the 1990s are offered.

Meanwhile, nearly 90 percent of all FDA-approved prescription drugs are available through Part D.

Also, thanks to Part D, 20 million seniors who had no previous drug coverage are now covered, and millions more find medicine more affordable than ever before. That’s why three out of four seniors enrolled in the program are satisfied, and more than four in five say they’ve had no problems getting their drugs.

Medicare’s prescription drug benefit works as well as it does because private companies are forced to compete for the business of America’s seniors, and seniors are free to choose. Moreover, the program shows that government can use its weight to leverage the power of the free market and cut costs for everyone.

If we apply those same principles to other parts of our health-care system, we’ll see lower prices, better service, and more choices. If we want to avoid a massive increase in health care spending over the next 10 years, we must first understand why prices are falling under Medicare Part D: private-sector competition and consumer choice always lead to lower prices.

Dr. Hunter is the former staff director of the congressional Joint Economic Committee. He is also the former vice president and chief economist of the U.S. Chamber of Commerce. He serves as a consultant to the pharmaceutical industry.

from the March 28-April 3, 2007, issue

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