The Medicare prescription drug benefit was, from the beginning, flawed in the details of its execution. But in general terms it is turning out to be one of the best health care investments our government is making:
Rewarding inventors with inefficient monopoly power has long been
regarded as the price of encouraging innovation. Public prescription
drug insurance escapes that trade-off and achieves an elusive goal:
lowering static deadweight loss, while simultaneously encouraging
dynamic investments in innovation. As a result of this feature, the
public provision of drug insurance can be welfare-improving, even for
risk-neutral and purely self-interested consumers. In spite of its
relatively low benefit levels, the Medicare Part D benefit generate
$3.5 billion of annual static deadweight loss reduction, and at least
$2.8 billion of annual value from extra innovation. These two
components alone cover 87% of the social cost of publicly financing the
benefit. The analysis of static and dynamic efficiency also has
implications for policies complementary to a drug benefit: in the
context of public monopsony power, some degree of price-negotiation by
the government is always strictly welfare-improving, but this should
often be coupled with extensions in patent length.
In other words, the optimal ex post incentive scheme involves some market power for drug makers. To some extent the subsidy counteracts the deadweight loss resulting from that monopoly by lowering real prices to consumers.
Here is my previous post on the topic, also indicating that the Medicare prescription drug benefit is not nearly as costly as has been charged. Of course subsidizing the pharmaceutical companies does not always sit so well with the left, so I am curious whether progressives will accept this result. And I am curious whether they envision single-payer programs as continuing this subsidy, or confiscating pharmaceutical company rents instead.
As a side remark, Martin Feldstein was the one who saw, way back when, that health care economics would become such a major field; kudos to him.
Addendum: Sorry for the omission, here is the paper itself.
Interesting — can you link to the paper from which this is pasted?
SOME RELEVANT ISSUES
- single payer amounts to a countervailing power via JK Galbraith that
offsets the market power of the medical industry; the availablity of
“any” medical treatment to select patrons in the U.S. compared to “less
variety but ubiquitous” treatment in Canada is rarely compared in a
correct economic context;
- forbidding government to negotiate drug prices allows drug manufacturers
to set maximum prices from which to price discriminate downwards to
maximize capture of consumer surplus;
- unit drug prices negotiated by pharmacy benefit managers and insurance
companies are confidential to prevent other groups from access to the
cartel deals;
- drug manufacturers strategically manipulate which drugs get on the list
of drug formularies made available by a particular plan to insure minimum
sales and revenue requirements;
- deadweight loss studies do not reflect the economic loss associated with
selling disease versus cure, patent abuse including copycat drugs and
generic buyouts;
- consumers have been taken in by the “gold standard” of FDA approved
drugs to the point of absurd claims about the dangers of “counterfeit”
drugs from Canada, etc – drugs continue to be sold to Canada despite
price caps because the price paid still covers production cost;
- consider proposal by Dean Baker to move patent rights to National
Institute of Health for public research and development, then license
the results for private production and distribution; prediction – drug
variety would increase, including vaccination drugs, as drug prices drop,
advertising and marketing expense would decline dramatically along with
physician distribution control;
- get more medical care into ordinary, walk-in retail outlets and on the
internet that would undercut prohibitive fees for a doctor’s visit,
including provision by less than licensed physicians; (example – it is
possible today to order one’s own false teeth made with the new
thermoplastics using a do-it-yourself impression mold kit – of course the
dental cartel will try to make it illegal if not already)
- allow more foreign medical students and physicians into the U.S. to
compete with the medical cartels;
- too much emphasis on total expenditure, not enough on unit price;
compare what Veteran’s Administration pays for drugs compared to other
plans; second-best, lower priced drugs can improve welfare much more;
compare a $20,000 quality-equivalent surgery in India to one in the U.S.
for $200,000;
- establish consumer reports on availalable medical treatment with
success/failure info, patient comments, etc
- Medicare Part D is essentially about shifting overpriced medical care
from Medicare to insurance companies and pharmacy benefit managers;
If you’re going to pick a government program that is the least bad then Medicare D is probably the best bet. Of course this is primarily due to the fact it is just subsidised private plan system.
As I work in this field I see the different results and attitudes of patients and their families when using the various government programs. I can’t count the number of times someone calls about how high their copays are for their perscription drugs when using a Medicare D plan. I usually then advise them to look for a better plan as their a number of them with much more competitive pricing (which there are plenty). Patients then have to take a more responsible role in keeping the costs down.
This is in stark contrast with Medicare A which is basically a “give me as much as you can even if I don’t need it because I have no financial stake in it” plan. Medicare A is riddled with fraud and abuse and is essential a cash cow for unscrupulous nursing homes, and other care facilities.
Prescription drugs covered in Part D could also serve as substitutes for medical services covered in Part A and B. Since drugs are generally much cheaper, this could actually save taxpayers money. Healthcare Economist has more on this topic.
p.s. is someone playing a joke on DeLong?
I read the RAND study you linked to, but I am not an economist and some of the reasoning is unclear to me. Assuming that their numbers are right, and that deadweight loss reduction plus innovation benefits add up to $6.3 billion / year, the net benefit would be this number plus the insurance value (not given) minus the cost of the the program ($27 billion/yr). Is the insurance value of the program really $20.7 billion?
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As long as people can afford their prescription drugs and pharmaceutical companies still get enough money to continue research and come up with innovations, it means that this plan really is great.Narconon
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