One of the worst things President Bush did in terms of the fiscal outlook for this country was to put forward the Medicare prescription drug benefit. This plan is estimated to add $8.7 trillion in unfunded liabilities to Medicare’s $21 trillion in unfunded liabilities. This is money that we won’t be able to pay. And one of my big concerns is that the Democrats are going to want to close the “donut hole” in Medicare’s prescription drug program.
The “donut hole” is a range where seniors covered under Medicare Part D have to pay 100% of the costs of the drugs that they purchase. This range is between $2,250 and $5,100. When prescription drug purchases are below $2,250 the participant will have to pay a $250 deductible and 25% of the cost of the drugs, plus the cost of the plan, currently $420 annually. Once past the “donut hole” the cost of drugs are covered up to 95%.
My problem isn’t that there is a desire to help out seniors who are struggling to cover the cost of prescription drugs, but that in doing so it will add even more red ink to an already grim fiscal outlook. Closing the “donut hole” could add trillions more to the cost of Medicare.
Is there reason to think that the Democrats will want to do this now that they have majorities in both chambers of Congress? Yes.
“he Democratic Prescription for Change will make prescription drugs more affordable by allowing Medicare to negotiate lower prices and using those savings to close the donut hole; provide seniors with the simple and reliable option of a plan administered by Medicare; and ensure reliable and uninterrupted access to prescription drugs by stopping drug plans from increasing co-payments and creating burdensome bureaucracy.
Democrats intend to enact our Prescription for Change in a fiscally responsible way — improving the benefit without burdening future generations with endless debt.
The key here, for me, is the idea that by using the government’s “negotiating” power to get better prices for the drugs and use those savings to close the loophole without adding to the cost. Frankly, I think this is a load of wishful thinking.
For one thing, the prescription drug plan will likely induce employers to cut back and even eliminate drug coverage benefits to retirees. This will have the effect of raising costs for Medicare. Also, these programs just seem to have a way of becoming much, much more expensive than they are initially deemed to cost.
Further, the government doesn’t “negotiate,” it dictates things by fiat. The government says to the drug manufacturers: This is the price you will get. It will, in effect, be a type of price control for a very large segment of prescription drug consumers. This will greatly reduce or even eliminate the profits for pharmaceutical companies. So what can we expect will happen? Pharmaceutical companies will stop investing in R&D for new drugs that benefit the elderly. After all, if the rate of return falls for such investments, then other investments start to look (relatively) better. So one long term cost, that won’t show up on the accounting ledger, would be to have fewer drugs that would extend/improve the lives of the elderly.
The bottom line is that the Democrats’ claims that there is basically a “free lunch” here are just pure bunk. One thing that economics should teach everyone is that nothing is ever free. Everything has a cost, even if it is just the opportunity cost. In this case, the cost here is the profits for the pharmaceuticals industry. While some might see such an appropriation reasonable in that it is for the greater good, there are some very serious issues with unintended consequences and perverse incentives. Add on that Bush is a “compassionate conservative” who hasn’t met a government program he doesn’t love to spend money on, and my feeling is that the fiscal outlook for the country is only going to get worse.
