If It Ain't Broke, By All Means, Break It

If It Ain't Broke, By All Means, Break It
By Townhall.com Staff
10/18/2011

Editor's Note: This column was authored by Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office

Just recently, President Obama's much-heralded "jobs" plan was derailed by the U.S. Senate, thereby adding to the evidence that it was designed with only one job in mind: the President's. At its core, the "President's Plan for Economic Growth and Deficit Reduction," includes such well-worn ideas as more infrastructure spending, state and local government bailouts, and new taxes. However, buried among these old standbys is a pernicious policy that seeks to undo one of the few aspects of federal health policy that actually works.

The President seemingly benignly proposes to "align Medicare drug payment policies with Medicaid policies for low-income beneficiaries." Sounds harmless. But looking closer reveals a $135 billion windfall to the federal government over the next ten years. This is not tweaking around the edges. Instead, it is a plan that would fundamentally alter "Medicare Part D" - the prescription drug program - to the detriment of our nation's seniors.

Presently, private drug plans negotiate with pharmaceutical manufacturers to secure rebates for certain drugs in exchange for enhanced coverage for those medications. Private drug plans then must compete for seniors' business on the strength of their drug coverage and cost, which in turn rewards those that negotiate effectively for rebates with manufacturers. This framework creates a natural incentive for rewarding value in drug coverage plans.

It also serves to keep down the cost of federal subsidies to the program. In its relatively short history, the power of this system has already been borne out. The initial estimates of the program cost by the Medicare Trustees undervalued the effect that a functioning marketplace can have on lowering costs. While other entitlement programs are getting more expensive, Medicare Part D costs have come in 40 percent lower than projected.

It is bizarre, then, that the President's plan would take aim at exactly these incentives. Or maybe not, as his health reform law gutted the popular Medicare Advantage program to pay for the creation of new entitlements, with the result that seniors have fewer choices. This latest proposal is simply déjà vu all over again: a new spending program financed in part by the elimination of a well-functioning health program.

Under the Obama plan, the market-driven rebate framework that animates Medicare Part D would be replaced with a bureaucratic, Medicaid-style pricing regime for low-income seniors. As the Congressional Budget Office notes, this would reduce "...manufacturers' incentives to invest in R&D on products that would be expected to have significant Medicare sales."

A just-released analysis by the American Action Forum concluded that this proposal would destroy 238,000 jobs. It further found that that forcing Medicaid-style price controls on the Medicare prescription drug program would hurt patients, industry and workers.

Far from an improvement to a well-functioning program, this policy change would upend the very system that provides cost-effective drug coverage, while assuring incentives for innovation in future therapies are destroyed.

This is a dramatic policy error. It is an undisguised money-grab to finance more spending that has an established and dismal track record of not creating jobs. It endangers choice and innovation in seniors' prescription drug coverage, and it is especially ironic that a policy that would demonstrably harm innovation in a crucial industry is embedded in an "economic growth" plan.

Altering Medicare Part D in this fashion is dangerous seniors, the U.S. economy and ultimately the goal of job creation the administration claims to pursue - unless you focus on the one job that matters to this White House.