GOP's prescription-drug plan defies critics

Donald Lambro
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Posted: Nov 30, 2006 12:01 AM
GOP's prescription-drug plan defies critics

When Congress passed the Medicare drug-benefit program in 2003, it was attacked fiercely by conservative critics for its colossal cost estimates and by Democrats for not exerting price controls.

The news media reported widely that the program, which took effect in January, was so incomprehensively complex that senior citizens could not understand it. Democrats, most of whom voted against it, ran in opposition to the program this year, promising to end its ban on negotiating prescription prices.

But it turned out the program's costs, thanks to its market-oriented competitive structure, are much less expensive than forecasters estimated, and that it has proven more accessible and understandable than all those pessimistic, doom-and-gloom stories said it would be.

It also turns out that the Democrats -- who demagogued the issue to get votes in the 2006 elections -- may not be able to make good on their pledge to close the so-called "doughnut hole" gap that requires many seniors to pay the full cost of the drugs for several weeks or months before kicking back into the benefit coverage.

For one thing, it appears the savings Democrats said they will get from negotiating lower drug prices won't produce anywhere near the amounts needed to close the benefit gap. For another, Democrats are divided over whether eliminating the gap via price negotiations (which would effectively turn into price controls) is good policy, or whether, as critics say, it will undermine the drug industry's medical innovations, limit choices and drive drug prices higher.

A revealing front-page story this week in The Washington Post by Lori Montgomery and Christopher Lee exposed the post-election confusion in Democratic ranks on this central issue. The article showed how the Democrats invented a specious applause-getting campaign line that had little if any substance behind it. Their lead tells the story:

"It sounded simple enough on the campaign trail: Free the government to negotiate lower drug prices and use the savings to plug a big gap in Medicare's new prescription-drug benefit. But as Democrats prepare to take control of Congress, they are struggling to keep that promise without wrecking a program that has proven cheaper and more popular than anyone imagined."

In fact, some of the Democratic alternatives offered in 2003 had a ban on price negotiating, too. And Democratic Rep. Fortney "Pete" Stark of California, who will become the House's health subcommittee chairman in January, is against an outright ban, seeking a "middle path" instead that would set price ceilings.

On the Senate side, though, Democrat Max Baucus of Montana, who takes over the Finance Committee, which oversees government medical-care programs, doesn't think much of Stark's idea, fearing it smacks too much of price setting. He will hold hearings only to "determine what the result would be of eliminating" the no-price-negotiating provision.

But the most surprising outcome in the Republicans' new drug-benefit program has to do with its costs to taxpayers and how wrong its earliest critics on both the right and the left were.

The costs are significantly lower than the exaggerated forecasts said they would be, owing to the system's structure, which allows a wide variety of drug providers to offer competing plans and premium prices. This year's costs will be about $26 billion, says the Congressional Budget Office. Next year's price tag is an estimated $45 billion, but there are new numbers that now suggest the benefit subsidy could fall as much as 15 percent by then.

As for all those stories that Americans were turned off by its complexity, the competing plans flooded the marketplace with clear explanations of its costs, and seniors flocked to buy into it, nearly 23 million as of today. Robert Reischauer, the savvy former CBO director who heads the Urban Institute and who was dubious of the program at first, provided this frank synopsis to the Post's reporters.

First, he said, many critics predicted that few if any private plans would be willing to participate in the government program. "Then too many plans came forward. Then people said it was going to cost a fortune. And the price came in lower than anybody thought. Then people like me said they're low-balling the prices the first year and they'll jack up the rates down the line. And, lo and behold, the prices fell again. And the reaction was, 'We've got to have the government negotiate lower prices.' At some point, you have to ask: What are we looking for here?"

When the administration was selling its prescription-benefit proposal, I attended a White House briefing with a small number of columnists, one of whom asked about costs. The briefer said they would be held down as a result of competition between plans, and that is what we're seeing.

"Every estimate had it costing more, much more. Competition among the drug companies is keeping the costs low," economist John Cogan of the Hoover Institution told me last week.

The question Democrats now have to ask themselves: Will they drive the program's costs through the roof by eliminating competition with rigid government price controls?