The cost of the Medicare prescription drug benefit

Megan and Andrew Sullivan are having a squabble about how much it cost (and here).  I would remind everyone of this recent research result:

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. 

And here's another research result:

Overall, a $1 increase in prescription drug spending is associated with a $2.06 reduction in Medicare spending.

Both papers are from very reputable sources.  Left-wingers focus on the "giveaways" in this plan and conservatives focus on the cost or maybe they don't walk to talk about it at all.  It's a little late to go through all the usual pro and con arguments on the policy as a whole.  I'd just like to note that – relative to its reputation – the Medicare prescription drug benefit is one of the most underrated government programs of our time.  If the goal is to cut or check Medicare spending, and I think it should be, we should do it elsewhere in the program.

It's also possible that the prescription drug benefit will do more for peoples' health (as opposed to their financial security) than will the Obama plan.  Try getting people to consider that.  The debate has become very emotional and not for the better.

I am more than willing to listen to criticisms of those cited studies.  But in the meantime it seems I should rationally believe what I do.

Here is a related post of relevance.

Comments

So we should get EVERYONE publicly financed medical care!!!!

What bothers me about CBO estimates for the drug benefit or for that matter Obama's plan is that neither CBO estimate place a value on extended and happier lives that we are purchasing with either program. Green eyeshades aside, if we had a before and after total utility measure--a with or without measure--total welfare would be greater because we would have more living persons living a better life. But, since you can't put that in a ledger book, or the value of a saved life, it doesn't get measured.

I had to double-check the author of this post. I was pleasantly surprised to see that Tyler was the author.

I am not in favor of government spending outside of core functions (defense, police, roads, courts, etc), but I guess a program that reduces the cost of other programs is a victory of sorts.

It's also possible that the prescription drug benefit will do more for peoples' health (as opposed to their financial security) than will the Obama plan. Try getting people to consider that.

It's even more plausible if you combine the drug benefit with Bush and the Republican Congress encouraging HSAs and CDHPs.

One comment of interest: "a program that reduces the cost of other programs is a victory of sorts." Try explaining this simple point to Republicans, especially in California, who gladly blocked programs that would have saved the state large amounts of money (partly by bringing in Federal dollars, partly in ways similar to the Medicare drug benefit). The point, it seems, is that once you decide to have any government at all -- and certainly once you decide to have the government provide for some social welfare -- then there are numerous examples where modest intelligent expenditure can produce both better welfare outcomes AND lower spending.

This is called "prudent government." There are libertarians, I know, who say we would be best off with no government, or at least no government role in social welfare, but they are clearly utopians (and, in my opinion, both wrong and immoral). For the rest of us, prudence is better than stupidity, which is another way of saying that values (not to say ideology) are important, but should never be the only basis for policy decisions. I respect intelligent libertarians who will consider prudence as well as principle, which is why this is such a great blog.

Americans, though, all too often seem to have a weird fondness for decisions that reflect 'principle' even when principle is evidently imprudent.

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Another comment of interest: "People are that cheap that they would pass on drugs because they have to pay for them..."

I thought it was widely accepted that people often fail to do things that are sensible in the long-run because of minor but short-run costs -- especially since it's something I can observe myself doing almost daily. Some huge proportion of properly prescribed medication, for example, is evidently never taken, either because it's inconvenient or tastes bad, or expensive to buy, or just because patients forget. Basic behavioral economics, here folks.

This also implies that if we gave patients "cash in place of treatment," as Floccina suggests, many would spend the cash on wide-screen TVs, SUVs and granite countertops, not on the medical care.

This is another way of saying that the behavior of patients is VERY hard to explain using a rational-consumer-market-incentive-rational-outcome model.

Prof. Cowan often gives examples of "markets in everything", often astutely. Maybe we need a series of counter-models from his exhaustive reading and research: "missing markets in almost everything," where it appears that market mechanisms are obviously not in place. Health care (in its byzantinely complex details) would be a good place to start looking.

Statistics are in the eye of the beholder. I have heard the exact opposite from people that I found credible: seniors and their doctors were not stupid; when the doctor said they needed to buy it, they usually did. As such, Seniors are richer, the government is poorer, and no one lives any longer.

"People are that cheap that they would pass on drugs because they have to pay for them even though they could save them from dangerous but free surgery"

Yes. Yes they would, though it's more accurate to say people would pass on drugs, or reduce dosages, that controlled a medical condition that might result in a need for much more expensive treatment, be it surgery or something else.

This is the first research I've seen, but I've always suspected the drug benefit saved more money than it cost. A relative of mine on Medicare skimped on medication because of it's cost; when that practice resulted in a heart attack, though Medicare didn't cover prescriptions (at the time), it did cover a helicopter ride to the hospital and 2 weeks in ICU, the cost of either of which would have covered several lifetimes of the prescription drug involved. Politically, I'm not a big supporter of programs like Medicare, but it makes no sense to have a medical insurance program that doesn't pay for prescriptions. They may be expensive, but they're a lot cheaper than - and can frequently prevent - inpatient treatment.

BTW, closing the donut hole would cost more money to be sure, but at the same time there wouldn't be the issue of seniors putting off perscriptions that would prevent costly medical procedures down the road and as such for those seniors who currently do hit the donut hole result in improved savings in that regard. Still, the main point stands, unless the main point assumed that liberals don't want a perscription drug benefit.

Am I reading this incorrectly? We increased prescription drug spending in Medicare by about $40 billion per year when Bush added Medicare part D. Where is the $80 billion savings?

"We increased prescription drug spending in Medicare by about $40 billion per year when Bush added Medicare part D. Where is the $80 billion savings?"

Michael-- the purported savings is that seniors might use cheaper drugs rather than more expensive surgeries and procedures now. Previously, they would have to pay for the drugs but not for the doctors' procedures, so they'd opt for the latter, even though they cost the government a lot of money. If the government, in President Obama's formulation, pays for more painkillers now but fewer hip replacements, it saves money.

Do I get this right? It saves more money by reducing the costs of another government program? How can you say this is a cost saver? It still costs money, it just reduces the wasted amount of other programs, that COST money?

I see this as some kind of scam. Yes, developping new drugs is costly, but subsizing those companies (like the French do) can backfire, if this concept gets universal. What happens if an over consumption of drugs sets in, because they are cheaper?
Also, this kind of thing is done in the agricultural business, where prices are kept low by subsidizing farmers in Europe. Now the price of a liter milk is diving and the farmers complain, most of the product has to be destroyed or exported (which destroys the market of those countries). Is it unreasonable to assume that something like this might happen to the pharma business as well?

Now imagine if we didn't take resources from the young to pay for mandated drugs for the old. Would the young spend it on things to avoid the need for drugs? Would the old leave the money to their heirs?

The arguments of the left (giveaway to drug companies) and the right (costs) are both correct, but the libertarian argument takes these arguments to their logical conclusion. All government spending is a giveaway to someone and all government spending impairs civil liberty.

So,

Does the drug benefit reduce current costs (i.e. Heart Attacks/MI/Stoke/diabetes complications) and just transfers them to be paid later, or does it actually reduce total costs in the long run? The hard truth is that at some point we are all going to pass away, and those last few weeks of heroic medicine are expensive. The best drugs in the world do not change that. My own experience: My mom had terminal cancer, we knew she was dying, so we sat down and talked about home hospice and keeping comfortable. No Tests, No Procedures. A painful and difficult confrontation with our own mortality and what it means to be human.

Thanks to John Thacker for the clarification. I agree, by the way, that some, indeed many things CAN be explained by assuming rational purchasers and a transparent market, but not all. In that sense, a rational mechanism may be part of the explained savings, here -- though it seems to me that one could equally say that there is a suspension of consumer irrationality by changing incentives, a 'nudge' effect if you like.

Andrew reveals that he does not understand risk pooling: "It has always been silly to pay for people's medical care." No, it has not, if "paying for" means "having insurance." The point of paying for people's medical care by insurance, whether via the government or via private health insurers, is to allow individuals to pool their risk for infrequent but very expensive medical treatment. If you, Andrew, eschew anyone else paying for your medical care, what will happen when you arrive, uninsured, at an emergency room with your body broken five ways by an auto accident you had. Should the doctors (or the accountants) search your pockets, find neither cash nor evidence of insurance, and shunt you to the "quiet dying" room they maintain for those unable to pay?

The reality is that very very few of us can pay for our own medical care (either at once or even if we save up) if we are unlucky and get an expensive or chronic condition. Most of us can easily pay for our expenses if we are lucky. Unless we are willing to let the poor and the imprudent simply die, we need to find some sort of risk-pooling mechanism, and (whatever the name), risk pooling means that we will "pay for people's medical care."

I have yet to hear a principled libertarian response to the 'uninsured patient' conundrum, beyond "we should all carry catastrophic care coveage." I'm happy to concur that catastrophic care insurance plus some kind of savings plan is a rational and possible way to handle health care costs -- but only if the catastrophic care is mandatory, which means that there is a direct state intervention involved. No one, so far, has responsed that we should let the uninsured or underinsured 25-year-old motorcylist bleed to death on the ER waiting bench, and no one has provided a plausible alternative that does NOT involve either an explicit insurance mandade or a de facto government guarantee.

"the libertarian argument takes these arguments to their logical conclusion. All government spending is a giveaway to someone and all government spending impairs civil liberty."

Well, the logic of that probably depends upon your axiomatic assumptions. Still, I do wonder how you would pay for a legal system. A world without any government spending is a world without any government. That isn't libertarianism- it's anarchy.

This kind of insurance cover is also known as Medigap insurance. The Medicare supplement insurance does not pay for every thing it only covers those services which are deemed necessary medically by Medicare. Sometimes even such benefits are offered by the Medicare supplement insurance policies which are not offered by Medicare like the facility of emergency care when someone is in a foreign country. There are 12 standardized Medicare supplement insurance policies. These policies are tagged with combination of different alphabets like Plan F, K, and L. These policies also offer different kind of benefits in different combination. For instance plans L, K and F provides options of high deductibles. And other plans like plan K, M and L offers components of cost sharing. With different combination of plans the combination of benefits also changes. There are many different plans like plan A, B, K,C, D, G, L, M and more and provide some common and some varying benefits. So it is very important to understand your uses and suitability so that you can decide which type of insurance plan you actually need. Some of the basic benefits include medical expenses like co-payments that are needed for service of hospital outpatient, hospitalization benefits, blood and Hospice. drug rehab San Francisco

Obama seems to be very confident about his health care plan and he is very sure that it will pass Congress. Maybe he knows something that we don't know, but last time I checked, he didn't have that many "friends". Vistabay rehab

The government is trying to establish something that I don't think many people agree with.I think everybody should have the freedom to choose the right medication from an expensive one to a cheaper one.Why are people forced to take medication which are more expensive than others which can do the job very well.Drug Treatment Center

Residential drug rehab needs to be available for all those who have fallen prey to addiction. Everybody has a right to break free from the prison of addiction and live a happy, healthy life.

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