Medicare Part D

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Sunday's Washington Post had an excellent front-page story on Medicare Part D, the new Medicare prescription drug benefit. Part D, which took effect at the beginning of this year, seems to have been a success. Some 22.5 million seniors have enrolled, and the cost–$26 billion–has turned out to be lower than projected. And "Medicare has received new bids indicating that its average per-person subsidy could drop by 15 percent in 2007, to $79.90 a month." Polls indicate that about 80 percent of enrollees are satisfied with the program.

Democrats have been proposing, as one of their first acts in the majority, to repeal the provision that prevents Medicare from negotiating directly with drug companies on prescription prices. They want direct negotiations, as in the Veterans Affairs program. VA drug prices are in fact lower, but the VA formularies include many fewer drugs and thus less choice for doctors and patients. The problem is that repealing the prohibition on direct negotiations can't force the Bush administration into direct negotiations. Under Part D, seniors can choose from insurance policies offering a variety of options; the insurers negotiate with the pharmaceutical companies or with prescription benefit managers who operate as middlemen.

It was an article of faith with Democratic politicians and political consultants that seniors would be dissatisfied with Part D. They would find the array of choices too complicated and hard to figure out. They would be angry at the "doughnut hole"–the fact that out-of-pocket drug costs from $2,250 to $3,600 are not covered. But it turns out that seniors, even if not as Internet-savvy as the rest of the population, were able to deal with the array of choices and were able to find plans they liked. There are even insurance policies available that cover the doughnut hole. Choice and competition turn out to work better, and more inexpensively, than centralized command and control. Don't take my word for it; the Post quotes a leading Democratic policy analyst:

Urban Institute President Robert D. Reischauer, a former director of the Congressional Budget Office, called that a remarkable record for a new federal program.

Initially, he said, people were worried no private plans would participate.

"Then too many plans came forward," Reischauer said. "Then people said it's going to cost a fortune. And the price came in lower than anybody thought. Then people like me said they're low-balling the prices the first year and they'll jack up the rates down the line. And, lo and behold, the prices fell again. And the reaction was, 'We've got to have the government negotiate lower prices.' At some point you have to ask: What are we looking for here?"

All of this is vindication for the people who in 2003 put Part D together–especially outgoing House Ways and Means Chairman Bill Thomas and Thomas Scully, then head of the Centers for Medicare and Medicaid Services, the Medicare-regulating agency–and for those who got Part D up and running: Mark McClellan, who recently resigned as head of CMS, and Health and Human Services Secretary Mike Leavitt. And it's a vindication of the Bush administration and the House and Senate Republican leaders who put together the just barely successful campaign to pass the 2003 Part D bill.

Interestingly, the Post notes that a couple of leading Democrats on healthcare issues, incoming health subcommittee Chairman Pete Stark and incoming Senate Finance Chairman Max Baucus, don't seem to be interested in the kind of sweeping changes Democrats called for during the campaign.

This is good news for the pharmaceutical companies and those of us who will be beneficiaries of their research programs. Direct government negotiations were expected and intended to destroy the pharmaceuticals' business model of pricing drugs under patent sufficiently high to fund ongoing and future research.

Social Security Fix?

Here's my Creators Syndicate column for this week, in which I look at the problems facing Democrats who want to promote more economic redistribution. It turns out it's not as easy as snapping your fingers. Thoughtful Democrats like former Clinton adviser Gene Sperling and Yale political scientist Jacob Hacker have argued that in our globalizing economy Americans face greater risks and that government should do more to protect them against risk. The problem is that protecting people against risk is a risky business. Consider Social Security: It's supposed to protect you against risk, but there's a risk that the system will become unsustainable as we have fewer workers per retiree. Or consider defined-benefit pensions: There's a serious risk your employer-provided pension won't be paid–a risk that has already been realized for the pensioners of various bankrupt steel companies and airlines. The government agency PBGC that supposedly guarantees your pension doesn't pay the full amounts supposedly guaranteed to retirees from those unionized companies. And PBGC faces potentially devastating costs if other defined-benefit pension plans collapse.

The good news is that defined-benefit pensions are being phased out; any sensible employer now provides defined-contribution pensions–i.e., tax-sheltered payments to 401(k) or similar individual investment accounts to employees. Hacker argues that that shifts risk from the employer to the employee. But Sperling proposes not a return to defined-benefit pensions but an expansion of individual accounts, perhaps with tax credits for contributions by low earners. This is also a proposal mentioned in Sebastian Mallaby's Monday Washington Post column on Social Security. Mallaby sees a Social Security bargain emerging from talks between Treasury Secretary Henry Paulson and congressional Democrats, with a raising of the ceiling on income subject to the FICA payroll tax and the Pozen plan for long-term reductions in benefits to high earners. That's fiercely opposed by Bush first-term economic adviser Lawrence Lindsey, who points out that it will amount to a whopping tax increase on productive earners. And Kevin Hassett of the American Enterprise Institute argues that such a deal can't make it through Congress. Mallaby suggests it could be more palatable to Republicans if a Sperling-style individual investment account plan could be passed, with contributions coming not from the FICA tax but from other income.

I think it's an interesting question whether such a grand bargain should be accepted by Republicans. On the one hand, an instant tax increase is obviously a bad idea. The Pozen plan is much less objectionable, since it would reduce benefits primarily for people well able to take care of themselves. Indeed, it might be objectionable to liberals on the grounds that it would move Social Security away from its status as an earned entitlement and toward the status of a welfare program. As for the expansion of individual investment accounts, it has the potential to be a conservatizing policy over the long term, just as FHA and VA home mortgage guarantees have been. Both encourage property ownership and aid people in their lifelong project of accumulating wealth. But liberals might find it objectionable as a transfer of money from the public sector to the private sector.