February 27, 2004

February 27, 2004 | Commentary on Health Care

The wrong remedy for Rx drugs

The growing price tag of the Medicare prescription-drug bill has caused many in Congress to take a much-needed second look at what they passed last November.

Unfortunately, there's a good chance they will wind up making things worse.

The problem, by now, is well known: Supporters assured skeptics that the legislation would cost "only" $400 billion over 10 years, despite warnings that it would cost much more. Now, before even one pill has been dispensed, the administration has upped the cost estimate by $134 billion.

Suddenly, lawmakers are looking for places to save money - a novel and welcome impulse for many. But the most widely proposed cure makes it clear that they've misdiagnosed the problem. They want to let the federal government use the "enormous market clout" of 41 million Medicare beneficiaries to drive down the cost of drugs.

The current law prohibits the federal government from interfering in price negotiations between drug makers and the private plans that will provide all of this new drug coverage for seniors. In the interest of "saving money," some lawmakers want to strike that clause. After all, if the government is going to buy drugs for seniors, shouldn't it use its new purchasing power to get seniors a better deal?

One problem is that drugs aren't a commodity like wheat, sugar or oil. With a commodity, all suppliers are offering essentially the same product, and price is what matters most to the buyer.

Thanks to innovation by pharmaceutical companies, doctors can choose from a number of different drugs when treating conditions such as high blood pressure, diabetes and elevated cholesterol. But for any given condition, one drug will work better for some patients, a different one for others.

Thus, if we use price as the deciding factor in figuring out which drugs to buy for Medicare enrollees, we'll do a poor job treating some patients' illnesses. The law of unintended consequences comes into play, too: If Medicare patients lack the right drugs, we may end up spending more for doctors and hospital visits.

Striking the right balance between the price and the availability of drugs is difficult.
That's why the authors of the drug benefit left that job to private insurers and pharmacy benefit managers (PBMs). They wrote the law to let Medicare beneficiaries choose between competing private drug plans. That way, the plans will have to respond to consumer pressure to keep costs down and to keep a broad range of drug therapies available.

Private PBMs do this for millions of Americans. There's no reason to believe the government could do a better job. (If it could, wouldn't it be doing it for the 10 million or so who rely on the Federal Employees Health Benefit Program?)

For one thing, when it comes to purchasing power, 41 million Medicare enrollees may sound like a lot, but it's only second tier. If Medicare ran its own PBM, it would still be only the country's fourth largest. Last year, AdvancePCS covered 75 million individuals, Medco Health Solutions 65 million and Express Scripts 57 million.

Plus, more than three out of every four Medicare beneficiaries have some kind of drug coverage already, and most get their drugs through a PBM. That leaves about 10 million beneficiaries without drug coverage.

Why not let them get drug coverage through one of the giant PBMs that already have track records successfully negotiating low drug prices while still maintaining patient access to a wide range of drugs? That way, Medicare can exploit the even more "enormous market clout" of private PBMs instead of trying to reinvent the wheel.

After all, if the government stepped into the middle of those negotiations, the PBMs would become irrelevant. That's because, to be more effective than PBMs, the government would have to tell drug makers: "Accept what we're willing to pay or we won't make your drug available in Medicare."

If that happened, it would leave some patients without the drugs that work best for them. Worse, they no longer could choose a different plan that covered the drug they need, since no other plans would be available. Instead, the patients (with the drug makers right behind) would have to go lobby Congress to overrule Medicare.

There's a better way: Instead of injecting more government dictates in Medicare, lawmakers should redesign the program along free-market lines. They should make even more plans available, so the people who lack coverage now can select the one that best suits their circumstances.

The goal is to make sure all retired people have access to the best drugs at the best prices. And the answer is more freedom, not more government tinkering.

Edwin J. Feulner is president of The Heritage Foundation (heritage.org).

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

Related Issues: Health Care

First appeared on The Hill.com