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Saving Medicare from a Fiscal Breakdown

By Joseph Antos

With 43 million beneficiaries, Medicare is America's largest health insurance program. Covering hospital stays, doctor visits, and prescription drugs, most seniors -- and many disabled Americans -- depend on it.

But it's also America's most endangered health insurance program. This year it will cost around $430 billion, or about 20 cents of every health dollar spent. Spending is growing more rapidly than revenue, and if current trends continue, the program will be unable to pay for all the hospital bills that come in by 2018.

Quite simply, Medicare is headed for a fiscal breakdown.

One reason for Medicare's steep price tag is the new Part D drug benefit, which will cost taxpayers more than $1 trillion over the next decade. But for two important reasons, Part D has demonstrated that the system isn't beyond salvation.

In recent years, prescription drugs have become an important tool for curing diseases and keeping people healthy. Now that Medicare covers pharmaceuticals, seniors have access to therapies that are often more effective and less costly than non-drug treatments.

Consider a 65-year-old male with high cholesterol. If left untreated, he could find himself rushed to the hospital for acute treatment of coronary heart disease where doctors have no choice but to perform bypass surgery.

On the other hand, if diagnosed earlier, he could be prescribed a daily cholesterol-lowering drug. Even with the high-cost of prescription drugs, it's much cheaper to keep people healthy and out of the hospital. So in the long run, paying for somewhat costly prescriptions initially could slow overall spending.

Even more importantly, Part D has proven that enhanced competition and choice can dramatically reduce costs.

When Congress created Part D, the delivery of prescription benefits was left to private insurance plans which must compete for a share of the market. Competition puts pressure on the plans to negotiate hard for low drug prices, to encourage the use of more cost-effective pharmaceuticals, and to offer affordable premiums.

Despite initial skepticism from political opponents, the competition strategy has succeeded beyond all expectation. The average Medicare beneficiary has more than 50 different Part D plan choices. More importantly, seniors and taxpayers are saving money. Premiums averaged just $24 a month in 2006, one-third lower than experts had predicted.

As for its budgetary impact, the Medicare drug benefit cost nearly $13 billion less than expected in its first year -- 30% below the $43 billion that had been budgeted.

Despite this success, many people argue that Part D drug prices are higher than they should be, resulting in higher costs for patients and taxpayers. They say that Medicare should follow the lead of the U.S. Department of Veterans Affairs, which negotiates drug prices directly with manufacturers. With the clout of 43 million beneficiaries behind it, Medicare can surely get a better deal than any of the private drug plans. Or so the argument goes.

That's a seductive argument. But it ignores some key facts.

First, the VA's low prices are possible because it puts a tight limit on the number of drugs physicians may prescribe. Whereas nearly 90 percent of all prescription drugs approved by the Food and Drug Administration are available through Part D, the VA drug benefit covers only about 19 percent of medicines approved since 2000.

For some patients, that means less effective treatments with more side effects.

Further, veterans using the VA system can't go to their neighborhood pharmacy. The VA requires them to see only VA-employed doctors at VA facilities, using VA pharmacies to acquire VA-approved drugs. It is unlikely that Medicare beneficiaries would accept such limitations.

Moreover, Medicare's negotiating clout isn't as large as it may seem.

Most Part D plans are operated by pharmacy benefits managers (PBMs) that specialize in administering drug benefits for insurers. Because they represent both Part D plans and private ones, the top three PBMs -- Caremark RX, Medco Health Solutions, and Express Scripts -- each negotiate prices on behalf of more than 50 million people with drug coverage.

It's hard to believe that Medicare, with 22 million Part D enrollees, could achieve discounts greater than a company with twice that number of customers.

As the Part D experience has shown, the best way to lower costs is through more competition, not more government management. Congress should build on this success and allow traditional Medicare to adjust its benefits, premiums, and other features in response to changing consumer demand and evolving medical practice.

Only then will we convert Medicare into a program that rewards the efficient and effective delivery of healthcare. And only then will we save the program.

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute. His latest book is “Restoring Fiscal Sanity 2007: The Health Spending Challenge.”

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