Medicare drug plan won't be easy to swallow

November 26, 2003|By JAY HANCOCK

THE PROMISE of the Medicare drug plan for seniors passed by Congress yesterday is exceeded only by its simplicity.

How's this for simple?

The program, which won't take effect until 2006, costs $35 a month in premiums. That is, you pay $420 a year before you swallow your first Xanax, Prevacid or Levitra.

Then there's a $250 deductible. So that's $670 so far and the plan hasn't even paid for a tummy-ache capsule.

Once the deductible is exceeded, Medicare starts covering your prescription expenses. But only at 75 percent. And only up to $2,250.

After that, the coverage stops working again. It's like a second deductible. You pay 100 percent of your prescription bills until your annual out-of-pocket spending hits $5,100. This is the "hole in the doughnut" people keep talking about.

After $5,100, the insurance kicks in again, but - you knew this was coming - not at 100 percent. Medicare pays 95 percent of prescription drug costs over $5,100.

True, if you're now paying $300 a month for cancer drugs, this is a good deal. But perhaps the best that can be said about this plan is that it produced headlines reading, "Congress passes Medicare drug plan."

For most in Congress, that's all that was necessary. They can say they did something. Details are irrelevant.

For pharmaceutical companies, the plan is hardly more scrutable - and maybe not even very beneficial in the long run.

Contrary to media myth, pharmaceutical stocks have not soared in anticipation of a federal Medicare bonanza. The Standard & Poor's 500 Index of big U.S. companies has produced a total return of 22 percent for its shareholders this year. The S&P 500 Pharmaceutical Index, meanwhile, has delivered a 3 percent return.

True, drug companies will make a bundle the next few years. The measure passed yesterday contains few price controls.

Drug outfits today see what hospitals saw in the 1970s: a deep, wide, new well of government-created Medicare dollars waiting to be pumped dry. The Congressional Budget Office's estimated cost of $390 billion for the new drug plan over 10 years is probably low.

But wait. Just as some hospital administrators came to rue their addiction to government revenue, so will pharmaceutical executives. The cost controls that squashed inpatient Medicare charges in the 1980s and put hundreds of hospitals out of business will someday descend on the likes of Merck, Pfizer and Pharmacia.

Opponents of the bill said its provisions for increasing the participation of private insurers in Medicare were a clever way of undermining the program and might lead to the end of government-provided health insurance for seniors.

Actually, the opposite is true. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 is the first move in the government headlock on big pharma.

In another decade or so, aging baby boomers will create a crushing burden for the present system. Price controls will be the only option for doing something about drug costs. And, because price controls are likely to arrive at a time of crisis, they may end up being worse for big pharma than if Washington had acted sooner.

What could Congress have produced instead of yesterday's mishmash? First, it should never have reduced Medicaid drug coverage for the poor to provide Medicare drug coverage for the middle and upper class.

It could have accomplished a double win by burdening drug companies with some sort of price constraints but simultaneously extending the lives of their patents.

The current system, in which drugmakers generally get only 20 years to develop and sell a drug exclusively, is absurd. Development often takes a decade or more. When you have only a few years to amortize your research costs once the revenue starts flowing, prices are going to be high.

Price controls and patent extension could have lowered costs for Medicare beneficiaries and taxpayers alike while retaining incentives to invent great new potions.

Congress also could have cut expenses by creating incentives or rules for seniors to use cheap, effective drugs rather than expensive, less-effective ones.

All pills are not created equal. Eventually, somebody besides the patient and the doctor - because they aren't the ones paying for it - will have to distinguish what's crucial from what's not.

But that's rationing health care, you say? Of course. But rationing is health care's future.

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