Uh oh, Ted Kennedy loves the Medicare bill

Bruce Bartlett
Posted: Jul 22, 2003 12:00 AM

In the old days, miners brought canaries down into the tunnels to detect methane. The birds were more sensitive to the deadly gas and worked as an early warning system. When they died, it was time to get out. For conservatives, Sen. Edward Kennedy, Massachusetts Democrat, is like a canary. When he starts supporting their initiatives, they should get out.

This is not an issue of guilt by association. Conservatives don't oppose measures just because Kennedy is for them. It is more that his sense of what is good for liberalism is so acute -- honed over 40 years as the leader of the liberal wing of the Democratic Party -- that he never supports anything that is fundamentally inimical to the liberal agenda.

Therefore, it is significant when Kennedy supports a Republican initiative, as he has done in the case of the prescription drug bill working its way through Congress. Although most Democrats oppose the measure as grossly inadequate, Kennedy counsels otherwise. This is just a "down payment," he tells them. "When we get this as a down payment, we're going to come back again and again and again to fight to make sure that we have a good program," Kennedy told CNN's Judy Woodruff on June 18.

From the liberal point of view, this is wise advice. The history of entitlement programs is that, once established, they remain forever and grow exponentially. Consider the original Medicare program enacted in 1965. According to the 1966 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, Medicare Part A was expected to cost $8.8 billion in 1990. In fact, outlays were $66.2 billion -- more than 7 times greater than estimated.

In all likelihood, estimates of the new prescription drug plan being considered will be off by at least the same order of magnitude. Two economists at the American Enterprise Institute have estimated that the present value of this proposal will be $12 trillion. This is a calculation in today's dollars of all future drug benefits discounted by the rate of interest. In effect, it is the burden on future generations of giving today's seniors, who will have paid nothing for it during their working lives, an extra medical benefit on top of those they already receive.

But even this calculation is too low, in my opinion. When the government begins to subsidize something, demand for it rises, pushing up the price. If the Medicare plan ends up subsidizing, say, one-fourth of drug costs, as the Senate bill does, eventually the price of drugs will probably rise by about 25 percent above what otherwise would have been the case. In the end, drugs will be no more affordable than they are today.

This will put inexorable pressure on the federal budget. Outlays will rise and rise and rise, even without the program expansions envisioned by Kennedy, which are probably inevitable. If history is any guide, the federal government will respond with price controls in order to save money. Canada already has de facto price controls on drugs, which is why they are cheaper there -- if you can get them. That nation now limits the availability of many new drugs in order to control costs.

The most serious problem in the long run is that price controls reduce the profitability of producing new drugs, which discourages research and development. Eventually, the supply of new drugs will fall. This is especially dangerous, in my view, given the recent outbreak of previously unknown diseases like SARS and monkey pox.

Other countries with state-controlled health systems have long been able to free ride on U.S. drug R&D. But if our system dries up, as I believe it will, who will pick up the slack? The federal government itself will probably have to become the main engine of future drug research. If so, that will only add to the ultimate cost of a Medicare prescription drug program.

The Bush administration and Congress should seriously reassess plans to enact a new prescription drug subsidy. Much, much more work needs to be done on designing such a program, with due allowance for the impact on supply and demand and the underestimation of future costs. The consequences of hasty action could be incalculable in terms of money and human lives.

Unfortunately, the odds of a serious reassessment are very long. Republicans in Congress seem to have convinced themselves that they have to have a drug subsidy bill to keep control. And the Bush administration has irresponsibly signaled that it will sign any bill, no matter how bad. Consequently, it has ceded any leverage it might have to shape the legislation in a positive direction -- effectively giving Ted Kennedy its proxy. At this point, the best we can hope for is gridlock in conference.