Medicare Prescription Drug Program as a Case Study in Government Incompetence

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Bernie Sanders and other socialists believe that the government should be in charge of providing healthcare to its citizens. “Medicare for all” is the most recent iteration of this concept that they have proposed.¬†

How does Medicare compare to comparable services provided by private companies operating in a free market? Given Congress’ recent action on Medicare prescription drugs, let’s look into drug coverage as part of our response to your question.¬†

Medicare was the last major health-care provider to begin covering prescription drugs

When Medicare was first established in 1965, its benefit structure was essentially a carbon copy of the standard Blue Cross plan that was available at the time. For the same reason that Blue Cross did not provide prescription drug coverage, Medicare did not provide it. Because pharmaceuticals were not a significant part of the health-care system at the time and did not necessitate a large financial investment, Blue Cross did not see the need to provide coverage for them. 

As time passed, events took a different turn

Right now, pharmaceutical spending provides the best return on investment for our health-care system. When compared to almost everything else we do in medicine, the benefits of drug therapy are much lower in terms of cost per dollar than the benefits of doctor or hospital therapies. 

By 2003, virtually every major health plan in the country had begun to cover prescription drugs, and many had been doing so for some time. This is because drug coverage lowers overall health-care costs while improving patient outcomes. However, Medicare did not begin covering prescription drugs until well into its fourth decade, and even then, it took significant effort in Congress to obtain coverage. 

What is the significance of the distinction? 

Private businesses will always make changes in their operations when there are opportunities to reduce costs and provide better service to their customers. However, nothing changes in politics unless there is a corresponding shift in the pressure exerted by special interests. 

Medicare’s drug coverage reflects political considerations rather than sound insurance principles. Regardless of the type of coverage purchased (car insurance, homeowner’s insurance, etc.), certain guiding principles typically serve as the foundation for insurance contracts. People tend to rely on third-party insurance for large expenses that could be financially devastating, while they self-insure for smaller expenses that they can easily afford on their own.¬†

Medicare, on the other hand, completely reversed the application of that principle the moment it was created. Whether it was a doctor, a hospital, or medications, Medicare has traditionally paid many small expenses that seniors could easily afford on their own, while leaving them vulnerable to catastrophic costs in the tens of thousands of dollars. As a result, seniors are at risk of financial ruin. 

What is the significance of the distinction? In any type of insurance plan, the vast majority of claims filed during any given year will be borne by a relatively small proportion of the insured. For example, roughly 5% of those covered by health insurance receive the majority of the funds. When the government serves as the insurer, 50% of the funds are spent on only 5% of the voters, who may be too ill to vote at all due to their condition. 

Politics, on the other hand, is the practice of taking from Peter to give to Paul. If there are a lot of Pauls but not a lot of Peters, that will always be an appealing option. 

As a result, there is a lot of political pressure in countries like the United Kingdom and Canada, where a minister of health is in charge of allocating funds for health care, to take money away from the few people who are sick and give it to the many people who are generally healthy. 

These same political considerations influenced the development of Medicare 

Medicare’s prescription drug coverage includes a “donut hole.” That is, after a certain point, Medicare begins to pay less for drugs than it has previously‚ÄĒuntil a patient’s costs exceed another threshold and catastrophic coverage kicks in. In other words, after a certain point, Medicare begins to pay less for drugs than it has previously. The only reason a “donut hole” exists is to benefit the vast majority of elderly people who have low drug costs. This benefit is “paid for” by increasing the amount of money paid out of pocket by the few elderly people who have high drug costs. This is also why only a small percentage of seniors pay more than $10,000 per year for specialty drugs, whereas the average senior pays only 25% of the cost of low-cost medications.¬†

Participants in Medicare must pay three separate premiums to participate in three different insurance plans. Traditional Medicare participants typically pay separate premiums to three different insurers: one for Part B coverage, which includes doctor care; another for Part D coverage, which includes drug coverage; and a third for Medigap insurance, which fills gaps in Parts A and B coverage, which includes hospital care. 

However, because the providers of these three plans have different financial interests, the result is waste, inefficiency, and substandard care for patients. 

Consider what would happen if one of the three insurers only covered pharmaceuticals and the other two only covered medical care. If a diabetic fails to take his insulin or any of his other medications, the drug insurer profits because it saves money by not having to pay the associated costs. If, on the other hand, a patient’s failure to take their medication as prescribed results in emergency room visits or hospitalization, the remaining two insurers will be responsible for covering the associated medical expenses.¬†

Because the insurers’ financial interests are diametrically opposed, they cannot collaborate to achieve the goal of providing care that is both cost-effective and well-managed.¬†

Medicare creates a perverse incentive by taxing the sick in order to benefit those who are healthy. When insurers are required to charge community rates (the same premium regardless of a person’s health status) and there is insufficient risk adjustment, they will have an incentive to overcharge the sick (in order to discourage enrollment) and undercharge the healthy. This is due to their inability to adequately adjust for the risks involved (to encourage their enrollment).¬†

The “rebate” system in Medicare Part D is distorted as a result of the program’s perverse incentive. Assume a diabetic goes to a pharmacy and discovers that the list price of insulin is $100; this presents a problem for the diabetic. Her 25% proportionate share of the cost is $25. She is, however, unaware that the insurance company, for example, receives a $90 rebate from the pharmaceutical company that manufactures the insulin. This implies that the true cost of the insulin to the insurer was only ten dollars; thus, a reasonable out-of-pocket charge to the patient would be two and a half dollars, rather than twenty-five dollars.¬†

What happens to the “profit” made by the insurer but not received by the patient in exchange for their insurance premiums? It is being driven out of business by competitors who offer lower premiums to Part D drug insurance purchasers.¬†

As a result, those who are ill and require medication are charged excessively, while those who are relatively healthy and pay premiums are charged insufficiently. 

Distinctions between the public and private sectors Approximately half of all Medicare enrollees are in the Medicare Advantage program, which allows them to enroll in private plans that are very similar to the plans offered by employers to their employees. This represents roughly half of all Medicare enrollments. Despite being regulated by the Medicare bureaucracy, these plans have enough freedom and flexibility to avoid some of the worst aspects of traditional Medicare. 

Participants in Medicare Advantage (MA), for example, must only pay a single premium to a single insurer, who is responsible for covering all costs. This indicates that the insurer’s interest is not conflicted and is integrated into both maintaining patients’ health and lowering costs.¬†

These plans have the same economic incentive to attract those with preexisting conditions as they do to attract those in good health, thanks to a highly sophisticated risk adjustment system. As an alternative to a rebate system, these plans provide patients with any discounts received from drug manufacturers, and sometimes even more. 

In the Houston metropolitan area, for example, Aetna, Cigna, Elevance (Anthem), and Oscar all offer MA plans that allow people with chronic illnesses to obtain maintenance medications for free or at a very low cost. 

A diabetic, for example, would typically not be required to pay anything for insulin or other medications, and they would also have free or $5 copay access to an endocrinologist. The reason for this is that the plans believe that by reducing the costs that the patient bears, they can avoid the higher costs associated with serious illness. 

IntegraNet Health provides an additional benefit to some plan participants in the form of the complete elimination of the “donut hole.” This is based on the idea that if patients do not skimp on their medication, they will have lower long-term healthcare costs.¬†

If given the opportunity, private health care and health insurance can better meet the needs of patients than government-run and directed health plans.