A Serious Drug Problem

By PAUL KRUGMAN

New York Times

May 6, 2005

There was a brief flurry of outrage when Congress passed the 2003 Medicare bill. The news media reported on the scandalous vote in the House of Representatives: Republican leaders violated parliamentary procedure, twisted arms and perhaps engaged in bribery to persuade skeptical lawmakers to change their votes in a session literally held in the dead of night.

Later, the media reported on another scandal: it turned out that the administration had deceived Congress about the bill's likely cost.

But the real scandal is what's in the legislation. It's an object lesson in how special interests hold America's health care system hostage.

The new Medicare law subsidizes private health plans, which have repeatedly failed to deliver promised cost savings. It creates an unnecessary layer of middlemen by requiring that the drug benefit be administered by private insurers. The biggest giveaway is to Big Pharma: the law specifically prohibits Medicare from using its purchasing power to negotiate lower drug prices.

Outside the United States, almost every government bargains over drug prices. And it works: the Congressional Budget Office says that foreign drug prices are 35 to 55 percent below U.S. levels. Even within the United States, Veterans Affairs is able to negotiate discounts of 50 percent or more, far larger than those the Medicare actuary expects the elderly to receive under the new plan.

After the drug bill's passage, Jacob Hacker and Theodore Marmor of Yale University estimated that a sensible bill could have delivered twice as much coverage for the same price.

Needless to say, apologists for the law insist that the prohibition on price negotiations had nothing to do with catering to special interests - that it was a matter of principle, of preserving incentives to innovate. How can we refute this defense?

One way is to challenge claims that the pharmaceutical industry needs high prices to innovate. In her book "The Truth About the Drug Companies," Marcia Angell, the former editor in chief of The New England Journal of Medicine, shows convincingly that drug companies spend far more on marketing than they do on research - and that much of the marketing is designed to sell "me, too" drugs, which are no better than the cheaper drugs they replace. It should be possible to pay less for medicine, yet encourage more real innovation.

Another answer is to point to the haste with which key players in the drug bill's passage cashed in - making the claims that they wrote a pharma-friendly Medicare bill out of genuine concern for the public's welfare look ludicrous.

Let's look at just two examples.

Billy Tauzin, who shepherded the drug bill through when he was a member of Congress, now heads the Pharmaceutical Research and Manufacturers of America, the all-powerful industry lobby group, for an estimated $2 million a year. In his new job, he's making novel arguments against allowing Americans to buy cheaper drugs from Canada: Al Qaeda, he suggests, might use fake Viagra tablets to get anthrax into this country.

Meanwhile, Thomas Scully, the former Medicare administrator - who threatened to fire Medicare's chief actuary if he gave Congress the real numbers on the drug bill's cost - was granted a special waiver from the ethics rules. This allowed him to negotiate for a future health industry lobbying job at the very same time he was pushing the drug bill.

If all this sounds like a story of a corrupt deal created by a corrupt system, it is. And it was a very expensive deal indeed. According to the Medicare trustees, the fiscal gap over the next 75 years created by the 2003 law - not the financing gap for Medicare as a whole, just the additional gap created by legislation passed 18 months ago - will be $8.7 trillion.

That's about three times the amount President Bush proposes to save by cutting middle-class Social Security benefits.

In fact, I have a suggestion for Mr. Bush. One way to prove that he's really sincere about addressing long-run fiscal problems, that his calls for benefit cuts aren't just part of an ideological agenda, would be to put Social Security aside for a while and fix his own Medicare program. Oh, never mind.

Nonetheless, someone will eventually have to take on the health care special interests. Who might do that? I'll write about that in the next installment of this series.