Don’t let budget talks threaten Medicare Part D

Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Steven Mnuchin are scrambling to finalize a two-year budget and debt-ceiling deal before the House leaves Washington for its August recess — even talking over the weekend. 

To counter the Democrats’ proposed spending increases, White House officials are pushing $150 billion in offsets, reportedly presenting House Democrats with a list of cut options worth $574 billion.

One of the largest line items is a drug-pricing proposal targeting Medicare. White House officials say it would save $115 billion.

But overhauling Medicare’s Part D drug benefit would be a colossal — and costly — mistake. It’s one of the most successful government programs in history. Part D is extraordinarily popular — providing coverage to some 43 million people — has cost significantly less than expected, and has actually reduced other federal health care expenditures. 

How often can you say that about a government program? 

The reason for this success? Part D’s market-oriented structure.

Most government health care programs — just like most government programs in general — take a top-down approach. The Veterans Health Administration, for example, has 1,700 facilities staffed by government employees who provide care to about 9 million veterans. Remember all the recent horror stories about the VA? 

Part D is radically different. The program is federally subsidized and regulated, but private insurers must design and administer the benefits. Insurers must compete against one another for Medicare beneficiaries’ business. Insurers thus have an incentive to negotiate big discounts from drug makers even as they offer generous benefit packages. That translates into low costs and high-quality coverage. 

The program has also been a success for taxpayers. Part D cost 45 percent less over its first 10 years than the Congressional Budget Office expected.

Beneficiaries are spending less than expected, too. Premiums have barely increased over the past 15 years, and today, the average senior’s base monthly premium is just $33. Surveys routinely find that nearly nine in 10 seniors are satisfied with the program.

Any change to Part D would erode the market mechanisms that have led to this success story.

The White House may end up backing an “inflation penalty,” which would prevent drug makers from raising prices faster than the rate of inflation — or face a stiff penalty. Some Senate Finance Committee members are also proponents of this idea.

Make no mistake, though. Any effort that tells drug makers what they can and can’t charge is a price control that would destroy Part D’s successful design. Seniors could eventually shell out more in premiums and more at the pharmacy counter if this change goes into effect. 

Moreover, these price controls would stifle medical innovation. 

It takes on average about $1.7 billion to bring a single new drug to market. And only a fraction of the potential new drugs make it through development, testing and Food and Drug Administration approval. But investors continue to pour billions of dollars into drug research — more than $100 billion in 2018 alone — because the United States allows market forces, and not government bureaucrats, to set the value on medical innovation. 

Investing in new drugs would dramatically decline under price controls. If the government can set arbitrary drug pricing limits based on politics rather than R&D costs, then the chance of recouping their investment, and potentially profiting, would be significantly reduced. So, investors would funnel their money elsewhere. 

Politicians are complaining that prescription drugs cost too much. But the most costly drug — in terms of shortened lifespans, reduced quality or life and higher hospital bills — is the drug that was never invented. 

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.