CEPR - Center for Economic and Policy Research

RX for Medicare

Mark Weisbrot
San Francisco Chronicle, February 13, 2000

In the battle over whether to include prescription drugs under Medicare, some have questioned whether taxpayers can afford the price. But the real opposition to Medicare drug coverage comes from those who fear it would cost too little: the pharmaceutical companies. They are fighting this coverage because they fear that Uncle Sam would negotiate to buy medicines at a much lower price.

Consider this:

-- We spend nearly twice as much of our national income as other developed countries on health care, yet still have 44 million people without health insurance.

-- Half of all U.S. health care spending is paid for through government pending -- either federal, state or local.

-- Seniors who lack prescription drug coverage because they rely solely on Medicare and cannot afford Medigap or other complementary insurance -- about a third of the elderly population -- are being gouged for their medicines. A recent congressional study found that they paid more than twice as much for the most common prescription drugs as the drug companies' most favored customers, such as HMOs. For example, a senior without prescription drug coverage would pay on average $188.96 per prescription for Norvasc, a high-blood pressure medication. The cost to a preferred customer would be $59.71.

The elderly generally are not well off, so it is not surprising to find surveys that show as many as 5 million senior citizens choosing between prescription medicines and food.

Last June, President Clinton proposed adding very limited prescription drug coverage to Medicare, the government's health insurance program for senior citizens and the disabled.

The pharmaceutical companies, whose rate of profit is more than three times the average of other corporations, have been using their enormous clout to block the plan, saying the industry could only accept it as part of a comprehensive plan to redesign the entire Medicare program.

To many people, it may not seem obvious why these corporate giants would care whether Medicare provides prescription drug coverage. But there is an important principle at stake: The drug companies don't want the government buying these medicines in bulk, and thereby negotiating for a lower price.

In response to Clinton's proposal for limited Medicare drug coverage, the industry spent millions on tacky, misleading TV commercials. "Flo," the arthritic Medicare beneficiary featured in these ads, predictably tells viewers that she doesn't want "big government in my medicine cabinet."

Until a couple of weeks ago, the drug industry insisted that it would only allow Medicare to cover prescription drugs if these were provided through HMOs or other private plans. About 16 percent of Medicare beneficiaries are currently enrolled in such plans.

Clinton hit back with a few jabs of his own, and then, according to the New York Times, Gordon M. Binder, chairman of Amgen and spokesman for the pharmaceutical industry, said that the government could make money available to private entities -- insurance companies and pharmaceutical benefit managers -- who could buy drugs and negotiate discounts on behalf of people who are covered by the regular fee-for-service Medicare program.

This takes some nerve. Who elected these people, anyway? It's a little disturbing, to see them telling the president what he can and can't propose to ease the burden of health care spending on the elderly.

Unfortunately, Clinton's plan does not provide much inspiration for people to rally around. Beginning in 2002, seniors who opt to pay $288 per year would get a benefit that would cover half of their prescription drug costs, but only costs of up to $1,000 a year (that is, a maximum benefit of $500).

Some of the poorest beneficiaries -- about a fourth -- would get a waiver for either the premiums, co-payments or both. But the rest would not, and many seniors would probably not enroll in such a plan. In 2008, the coverage would go up to $5,000 (maximum benefit of $2,500), with the premium increasing to $528 per year.

But even this limited coverage is much less than it appears -- more than half of the $5,000 benefit would be eaten away by projected increases in the price of prescription drugs. This is why any plan to include prescription drugs under Medicare needs to also include a plan for controlling prices. A logical step for this would be to use the government's buying power to bargain for lower prices.

The Clinton plan stops short of this, but a reform bill currently before Congress would do it. The Prescription Drug Fairness Act for Seniors, sponsored by Reps. Tom Allen, D-Maine, and Henry Waxman, D-Los Angeles, has 138 co-sponsors in the House. But the drug companies are even more determined to kill this proposal in the cradle.

Documents leaked from a recent strategy meeting of PhRMA (the Pharmaceutical Manufacturers of America -- annual budget: $52 million) reveal a packed calendar of grassroots lobbying campaigns and state media tours, as well as a slew of studies by industry-sponsored think tanks. Interestingly, this planning -- which included efforts to kill the Clinton proposal -- took place less than a week after industry spokesmen announced that they wanted a truce with the Clinton administration in the war over drug prices. The standard argument of PhRMA is that they need their monopoly profits in order to fund all the research and development that brings us new medicines. But this just raises more important questions about the whole process of funding medical research.

From a strictly economic perspective, granting monopolies to patent-holders is not necessarily an efficient means of funding research and development. Unregulated monopolies are inefficient, leading to higher prices and less availability than would be best for society.

That's one of the reasons our government allocates tens of billions of dollars each year to medical research. In fact, about three-quarters of cancer drugs were discovered with the help of government grants. But the drug companies still seem to end up with the patents -- and the ability to charge exorbitant prices. So American consumers are doubly exploited: First we get to subsidize, with our tax dollars, the research that creates the drugs. Then we get to pay the highest prices in the world -- twice what Canadians or Europeans pay. Yet we are not allowed to import these drugs from countries, such as Canada or Great Britain, where they are sold at a much cheaper price. (It seems that the principle of free trade is not sacrosanct after all).

But it's even worse than that: The monopoly profits of the drug companies then cycle back to fund everything that keeps the system in place: lobbying ($148 million over the last two years), election campaign contributions and PhRMA. Not to mention the $8,000 to $13,000 per doctor that the industry spends each year peddling its wares, buying gifts and paying for travel and other favors in order to influence their choices.

The other major obstacle to overall reform is the only industry that spends more on lobbying than the drug industry: insurance. Until we break the stranglehold these corporations now hold on public policy, the health care reform we need will remain out of reach.
