Tuesday, April 24, 2007

Medicare's Day of Reckoning Has Arrived

The day has finally arrived. This year, that's right, 2007 is the long-denied year that Medicare payments will exceed revenues, according to trustees. Although some thought it might take a few more years, the prescription drug benefit program pretty well tossed that idea out the window and moved up the timeline considerably, a concern that Congressman John Shadegg and others voiced when the program was debated. Of course, as recently as last year, officials were claiming that the program was having no significant effect on Medicare solvency—another congressional spending smoke and mirrors game.

Within 6 years, nearly half of Medicare costs will not come from payroll witholding taxes for Medicare, but from general tax revenues.

But that's not all. Social Security, more commonly mentioned as an impending entitlement crisis, has a few years left, it seems. It can hold out for ten more years before experiencing the same inevitable fate. Of course, this doesn't take into account that nearly a third of the deficit already exists as IOUs the government wrote to itself to fund Social Security shortages, a practice most would label "juggling the books."

In a little more than 20 years, combined Medicare and Social Security costs and service on the national debt will consume EVERY dollar of taxes paid. How's that for a reality check?

In the wake of thousands of cases of Social Security fraud including identity theft by illegal aliens, and the fact that some in congress want to extend SS benefits to illegals including those convicted of identity theft, it's hard to imagine this problem being resolved anytime soon. So, welcome 2007, the day of reckoning; Farewell to any hope this congress will confront it.


Sirocco said...

Man, sure would be nice if we could, you know, help lower costs by doing something radical, such as letting medicaid negotiate drug prices directly with the pharmaceutical company.

Or how about cutting out nearly all the bureaucratic layers and expenses involved in the health insurance industry?

Nahhh ... we can't possibly consider implementing ideas that might help lower the money individuals pay at the expense of corporate revenue for said insurance companies. That' practically un-American!

AZAce said...

Some don't remember what happened when Jimmy Carter "capped" gas prices to "get us the best price." All stations suddenly raised their prices to the cap and demanded that Carter raise it again, which he did...again...and again...and again.

There are some really basic economic principles at play here. Consumer choice is amazingly powerful when it comes to prices. I'll pass on big brother negotiating prices for so many Americans that it does what Carter's failed policy did. But I'll support granting power to the consumer so that those "bureaucratic layers and expenses" can be addressed by the marketplace.

Of course, I don't expect those who created the problem in the first place by developing a program that couldn't be sustained to do the logical thing. No, they will jump on the blame Bush bandwagon and spend their energy with one bad idea after another each of which will create a problem worse than the initial one.

Sirocco said...

You are mis-construing the issue here AzAce. The suggestion is most certainly _not_ to provide an artifical cap on the drug prices. Rather, it's to provide consumers, as a group, to negotiate prices on the drugs.

AZAce said...

Medicare is not "consumers," however, it's the government. Consumers negotiate with their feet every time they decide between a Walgreens and a Safeway, for example. If Medicare (the feds) negotiates a price for such a large group, it takes away the effect of consumer choice and establishes an artificial price that you can bet pharmacies will immediately set their prices at and push to increase them as they are locked into a system they cannot afford to not participate in. Assuming the government prices are lower than the market rate, it would be logical to assume prices for everybody else will have to rise in order to compensate. It's hard to see the benefits of socializing the system further.

Sirocco said...

Medicaid would represent consumers. There is nothing unusual in this type arrangement -- individuals grouping together in order to leverage the power of mass purchasing.

If non-Medicaid individuals (I am one) pay more they may wish to join together and leverage the same power.

By the way, I believe there is little, if any, differentiation on _presecription_ drugs between pharmacies.

Framer said...


"I believe there is little, if any, differentiation on _prescription_ drugs between pharmacies."

Walmart disagrees with you. :)

"Allowing Medicare to negotiate" rhetoric is simplistic beyond use. It is very likely to turn into price controls, which invariably lead to shortages and rationing. Additionally, I thought that this article may be of use for you in particular as it raises a concern I had never thought of.

The inevitable formularies that would result from this Medicare policy would have a disproportionate negative effect on minorities.

If I get ambitious enough, I may even post on this, though I doubt that too may would be interested.

AZAce said...


Having negotiated corporate benefits plans for my employer, and been in a position of paying for my own prescriptions, I can tell you that if you call around to see how much pharmacies charge for most any drug, there is a HUGE difference between many pharmacies. I once had a drug that varied between $50 and $150 for the same brand name, same amount, same prescription...everything.

Sirocco said...

Fair enough. It sounds like you have experience with the matter, so I accept that.

Given that, why wouldn't I want to leverage mass buying power with the ability to have someone else negotiate best rates (rather than having to make all those phone calls myself)?

Framer said...

1. Because most of us are not on Medicare at this point. Medicare price controls will drive up the total drug price for everyone in a private HMO or paying individually.

2. Because the standard formulary table that would be created with Medicaid may not fit your individual situation. Most people, for instance will not have to worry about sickle cell anemia, for others it is a big problem. It would be better to be able to choose a plan best suited to your medical needs.

3. That is why the current plan, though not perfect, and much maligned is better. It allows for leveraging like you want, and a degree of specialization and customization. There is waste and inefficiancy, but the standard attack is that it is too complicated and offers too many choices to understand. Remove the inefficiancy in the current plan, train people to help those on medicare make the proper decisions, and it may work.

Allow the Medicare beauracracy to try to create a one size fits all plan, it will bankrupt us, and leave too many underserved.

Sirocco said...

Let's take this from the top again.

The current plan is better than before, but has notable flaws, such as the infamous "hole".

There is a _reason_ why people who live near Canada drive across the border to buy prescription medication -- because it's cheaper there.

There are a variety of reasons it's cheaper there, but one of them is because the government is able to negotiate on behalf of it's citizens with the phara companies.

On a smaller scale, that's why AzAce was negotiating on behalf of companies he worked for.

Now, I am well aware of the argument "the first pill costs $1 billion, everone after costs ten cents" argument. On some level, we have to provide incentive for companies to do basic research into new drugs.

However, when even a fairly modern nation with a comparable standard of living has notably cheaper prescription costs, then something is wrong with our system .. and maybe we should adopt some principles from systems that seem to work better ("better" in this case meaning better rates for consumers, not better profits for pharma companies).

Framer said...

Reasons why SOME drugs are cheaper in Canada:

1. Favorable exchange rate

2. Canadian drug companies are not allowed to market their products directly to consumers. Therefore there are no advertising costs in Canada.

3. "The biggest reason for the price disparity is the existence of drug price controls in Canada. The Patented Medicine Prices Review Board, a quasi-judicial body of the government created in 1987, reviews pharmaceutical prices and enacts caps for patented drugs and medicines prices."

So when you say "the government is able to negotiate on behalf of it's citizens" you mean mandatory price controls.

Keep in mind that you lose choice, drugs not on the formulary are more expensive, and eventually you will get shortages.

As an economic model, price controls always fail in the long run, as they lead toward shortages, subsidies, or both.

Sirocco said...

Let me get this straight ...

So we, as citizens, are paing higher prescription fees in order to help pharma companies endlessly advertise their drugs to me? F*** that. I get the info I need from my doctor. I'd much rather they never advertised and passed the savings along (like _that's_ gonna happen).

Favorable exchange rate may be part of the factor. However, Canada is not Mexico. you don't have significantly lesser costs on labor, etc. As such, it's going to be a minimal factor, at best.

As for the third point, after the review the pharma companies are, presumably, still making sufficient profit to actually sell their drugs there. If not, they always have the option to simply not market their goods there if they feel the margins are too thin. That's part of negotiation as well.

By the way, I can _just_ as easily argue that pure capitalism _always_ leads to shortages, eventually. In any real, practical economic model you have you will eventually get shortages. It's a truism.

Sirocco said...

I should note I think the "stagnation" issue is a legitimate concern (actually, they all are). The trick would be finding some price where there is still enough money flowing to the pharma companies to overcome this effect. Still, in a period where drug companies are making record profits, there ought to be some give here.

Framer said...

Personally, I have never really understood the demonization of the drug companies (not accusing you of this). Currently, about 20% of revenue is realized as profits. I'm actually fine with that. I want them to grow, I want them hiring the best talent, they do a tremendous amount of good.

I'm fine with the advertising. The more the drug is known, the more it is used, the more it is produced, the faster the price comes down. I'm a big believer in that invisible hand stuff.

And yes, a free market involves shortages, but it also has the means necessary to correct them almost automatically and they tend to be relatively minor. Shortages are at the end of the cycle of price fixing and it is always extremely ugly to fix.

Like Social Security is going to be.

Sirocco said...

My primary beef(s) with drug companies fall into several categories:

1. The way they fight tooth and nail to keep generics off the market when their initial exclusivity time comes up.

2. Their use of barely tweaking an existing formulation (taking something that was, composed of 2 parts X and 1 part Y, changing it to 2.00001 X to one part Y, call it a brand new drug and market it as such, despite the fact no real research costs were involved.

As for costs coming down with more use, I haven't researched this, but it's my impression drug costs do not drop significantly, if at all, no matter how much they are used until the exclusivity period expires amd competing generics are on the market. This is true even when adjusted for inflation (see reports here).