HomeHealth Care NewsMedicare Prescription Drugs: A Case Study in Government Failure - Commentary

Medicare Prescription Drugs: A Case Study in Government Failure – Commentary

Sen. Bernie Sanders and other socialists think the government should provide health care, and their latest version of that idea is “Medicare for all.”

How does Medicare stand up against private, free-market coverage with similar benefits? Let’s examine drug coverage, since Congress just acted on Medicare’s prescription drug benefits.

Pursuing Votes

Drug coverage lowers the overall cost of health care and improves patient outcomes. As a result, by 2003 virtually every major health plan in the country was covering prescription drugs and had been doing so for quite some time. Medicare, by contrast, was well into its fourth decade with no drug coverage, and it took a major effort in Congress to get coverage even then.

Why the difference? Private businesses always tend to make changes when there are opportunities to lower costs and serve their customers better. In the political arena, however, nothing changes unless special interest pressures change.

Medicare has traditionally paid many small expenses that seniors could easily afford on their own while leaving them exposed to tens of thousands of dollars of catastrophic costs. The reason why has to do with the nature of insurance.

In any scheme, a small percentage of the insured will make up a very large percentage of the claims in any given year. In health insurance, for example, about half the money is spent on 5 percent of the insured. When the insurer is the government, that means that half the money will be spent on 5 percent of the voters—people who may be too sick to vote at all.

Favoring the Healthy

Politics is the art of taking from Peter and giving to Paul. That will always be tempting to do if there are a lot more Pauls than there are Peters. In Canada or Britain, which have government-run health care systems, there is intense political pressure to take from the few who are sick and spend money on the many who are relatively healthy.

Those same political realities have affected the design of Medicare.

Medicare has a “donut hole” in its drug coverage. That is, after a certain point, Medicare pays less for drugs than it has been paying, until a patient’s costs reach another threshold and catastrophic coverage kicks in.

The only reason for a “donut hole” is to create a benefit for the many seniors with small drug costs. That’s also the reason why a very small number of seniors pay $10,000 or more every year for specialty drugs while the typical senior pays only 25 percent of the cost of inexpensive drugs.

Conflicting Financial Interests

Seniors in traditional Medicare are usually paying separate premiums to three different insurers: one for Part B coverage for doctor care, a second for Part D coverage for drugs, and a third for Medigap insurance to plug the holes in Part A (hospital care) and Part B.

The suppliers of these three plans have differing financial interests, and the results are waste, inefficiency, and inferior patient care.

Consider the effect of having one insurer cover drugs while the other two are covering medical care. If a diabetic skips his insulin and other medications, that increases the profit for the drug insurer because it doesn’t have to cover those expenses. However, if such nonadherence to a drug regimen leads to emergency room visits and hospitalization, the other two insurers will have to bear the costs.

The fact that the insurers have to compete and oppose financial interests means there is no possibility of alignment with the goal of cost-effective, well-managed care.

Overcharging the Sick

When insurers are forced to charge a community rate (charging everyone the same premium regardless of each individual’s health status) and there is no adequate risk adjustment, they will have an incentive to overcharge the sick (to discourage their enrollment) and undercharge the healthy (to encourage their enrollment).

In Medicare Part D, this perverse incentive leads to distorting effects in the “rebate” system. Suppose a diabetic goes to a pharmacy where the list price of insulin is $100. Her 25 percent copayment amounts to $25. However, unbeknownst to her, the insurer is getting a $90 rebate from the drug company that produces the insulin. That means that the real cost of the insulin to the insurer was only $10, so a fair out-of-pocket charge to the patient would be only $2.50, not $25.

What happens to that additional profit the insurer makes but doesn’t share with the patient? It gets competed away by charging lower premiums for buyers of Part D drug insurance.

In this way, the system causes the sick who need drugs to be overcharged while the relatively healthy premium payers are undercharged.

Preferring Private Sector

Roughly half of all Medicare enrollees are participating in the Medicare Advantage program, where they enroll in private plans that look very much like the plans employers offer. Although these plans are regulated by the Medicare bureaucracy, they have enough freedom and flexibility to avoid some of traditional Medicare’s worst features.

Instead of a rebate system, these plans pass along any discounts from drug producers to the patients—plus even more savings.

Given the freedom to do so, private health care and private health insurance can meet patients’ needs far more effectively than health plans operated and directed by the government.

John C. Goodman (johngoodman@johngoodmaninstitute.org) is president of the Goodman Institute for Public Policy Research and co-publisher of Health Care News. An earlier version of this article appeared in Forbes on September 13, 2022. Reprinted with permission.


John C. Goodman
John C. Goodman
John C. Goodman is president of the Goodman Institute for Public Policy Research.


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