CMS as a PDP: A Part D compromise?

Today's Wall Street Journal has a great editorial by Alain Enthoven and Kyna Fong on the Democrats' plan to push for direct negotiations between Medicare and the drug companies. See Pelosi on Drugs.

Despite these logical arguments, “Direct negotiations” has a simple, populist appeal that is hard to ignore. Just consider the fact that the issue was only narrowly defeated in a Republican-controlled House and Senate. (See my July post The Part D direct negotiations movement for background.)

I predict that a new compromise will emerge to avoid the prospect of a Presidential veto. Here's a brief sketch of how it might work:

• Medicare beneficiaries will have the option, but not the obligation, to enroll in a national plan based on directly negotiated prices.
• The current system of regional PDPs will remain, in effect putting the government into competition with private plans.
• The government plan will receive an additional rebate analogous to the Medicaid rebate program, which seeks to ensure that Medicaid agencies pay the lowest (“best”) price available to any other customer.

If enough seniors believe that lower drug prices are the only key to lower premiums, then the government will capture more beneficiaries. However, seniors may be rightly skeptical of the government’s one-size-fits-all plan and presumably lower service levels, allowing the PDPs to survive and choice to remain.

Happy Jack

Part D has proven to be a very popular program, judging by the many polls on the topic. According to the latest poll from the Wall Street Journal and Harris Interactive:

• Three-quarters of enrollees say they are satisfied with the plan, compared with 24% who aren't satisfied.
• 70% say the plan has saved them money on prescription drugs, compared with 20% who say it hasn't.
• The plan has been easy to use, say 82% of respondents vs. 13% who disagree.

PhRMA also released its own study (available here) showing a steep (74 percent) drop in average patient out-of-pocket costs.

The Seeker

Yet the direct negotiations crowd ignores the risk that changing the structure will lower satisfaction by reducing choices. I worry that the Democrat’s emotional focus on squeezing a few theoretical pennies out of drug makers may blind them to this variety.

A big benefit of today’s structure is the choice created with the competitive system. I looked up the plans in my home zip code in Pennsylvania using CMS’ online Prescription Drug Plan Finder. I found 66 prescription plans for 2007 with monthly premiums ranging from $14.80 to $104.50 (average premium = $36). There is substantial variation in deductibles, cost sharing, and coverage in the gap. A national view is available in this handy summary from the Kaiser Foundation.

The range among my local 66 plans indicates that seniors have a lot of choices and can select a plan based on personal needs and individual situation. I suspect many seniors would not be happy in a one-size-fits-all plan. And as I pointed two weeks ago, direct negotiations may also throw the pharmacy industry into chaos and help Wal-Mart – true irony for Democrats! (See Are the Democrats helping Wal-Mart's Pharmacy?

If Medicare offered its own PDP, then the actual beneficiaries could decide whether the government's (presumably) lower prices are better than one of the other 66 options available. Seems fair to me.

It’s Not Enough

I also want to comment on the embedded assumption of direct negotiations -- lower pharma prices are automatically beneficial to society in the long run. This assumption is not as self-evident as it might appear.

To quote from the Amazon description of Richard Epstein's new book Overdose: “While critics of pharmaceutical companies call for ever more stringent controls on virtually every aspect of drug development and approval, Epstein cautions that the effect of such an approach will be to stifle pharmaceutical innovation and slow the delivery of beneficial treatments to the patients who need them.” (I am currently reading this dense, challenging book and will post a review sometime after my next long flight.)

Or as Peter Pitts as Drugwonks puts it: "to paraphrase Winston Churchill) our pharmaceutical patent system is the worst way to stimulate and support health care innovation – except for every other system." (See There’s a prize in every box!)

I recently attended a conference at which the keynote speaker made an off-hand remark that “drug prices are too expensive.” But as an economist, I must ask: “Too expensive compared to what?” Getting sick? Dying?

By all means, let's have a vigorous debate about how to make tough tradeoffs in health care. But is it naïve to think that mandating “lower” prices will not have unintended and potentially undesirable consequences.

Lunch is still not free.

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P.S. Observant readers will recognize the subliminal plugs for my favorite new CD Endless Wire. Hope you buy before you get old!