The Medicare prescription drug program, better known as “Part D,” was the first step towards privatizing Medicare. By all accounts it is successful and should be a model for overall Medicare reform. It gives seniors a choice and it relies on private competition to keep costs under control. By all measures it is coming in well below expected costs.
Depending on the outcome of a Supreme Court decision in June, that could all change. President Barack Obama’s deficit reduction plan allows Medicare to negotiate the prices charged for prescription drugs. A provision in the Affordable Care Act allows the government to sets prices and tell the pharmaceutical companies to take it or leave it. It sounds like a great idea until the pharmaceutical companies fight back with shortages and other arm twisting tactics.
Now, mind you, I have no love for the pharmaceutical industry. They spent an estimated $2.3 billion lobbying Congress between 1998 and 2011, and the effective return has been a free ride with Medicare and record breaking profits. To some degree, it’s been mutually beneficial. Here’s why.
Prior to the addition of Medicare Part D there were no stand alone prescription drug insurance policies for seniors. It’s not because the demand didn’t exist; they simply were not economically viable for the private insurance industry. Not just for seniors either. This includes all demographics.
So, what changed? That’s simple, its money and lots of it. In order to achieve private drug plan insurance for our elders, the government had to promise massive subsidies. In fact, the bulk of the revenue private insurers receive for underwriting Part D plans comes from the government.
As of 2011, approximately 17.7 million seniors enrolled in Original Medicare also have a prescription drug plan. Another 9.9 million seniors get their Part D plan as a part of Medicare Advantage. An additional 6.4 million seniors are still in the workforce and many of their employers are entitled to receive government subsidies for their drug insurance coverage. All told, about 73% of all beneficiaries have government subsidized drug plans.
In 2012 the American taxpayer will pump $52 billion into Medicare to pay for private drug insurance for beneficiaries. Over the next 10 years, the total taxpayer bill will be approximately $806 billion. The cost explosion – and the reason for the cost explosion itself – is highly misunderstood and often used as a political weapon by both parties. Let’s explore the truth.
The primary reason for the huge jump in cost is the number of Americans becoming eligible for Medicare. More than 10,000 of us turn 65 each and every day. In the next fifteen years or so the beneficiary ranks will swell from 47 million to nearly 80 million.
The second reason for the cost increase is that the coverage gap that was designed into the Part D plan program is being closed, shifting the cost from seniors to taxpayers. Closing the coverage gap (aka, the “donut hole”) is a component of the Affordable Care Act, often referred to as ObamaCare. The savings per traditional beneficiary are said to be $86 in 2011, rising to approximately $649 in 2020.
The coverage gap is very unpopular with seniors, but let’s understand exactly what it is and why it was put into place to begin with. Plain and simple, it’s a cost control measure that was designed to shift the burden of extraordinary need to seniors and their families until individual costs reach a “catastrophic coverage level,” at which time the burden shifts back to the government, insurer and the pharmaceutical companies.
Under the Affordable Care Act, the donut hole will be closed for good, shifting the majority of the cost for senior drug coverage to the American taxpayer. This is great for elders and the disabled, but not necessarily a good thing for the younger generation that will be forced to carry the heavy load.
It’s completely unknown if the Affordable Care Act can control drug pricing, as claimed, to reduce overall cost. On one hand the government gets to negotiate with an increasing elder population guarantee. On the other hand the drug makers are notoriously greedy.
As the Affordable Care Act is being examined by the Supreme Court, all Americans need to be thinking about how to drive the cost of healthcare down. Even if ObamaCare is overturned by the Supreme Court as an unconstitutional law, we are left with the issue of rising drug costs. It’s not just a senior issue, it’s an American issue. As goes affordable healthcare, so goes our economy and prosperity.