A landmark in corporate welfare

Medicare Part D is a fiscal debacle – and a lobbyist's dream.

By Mark Lange

from the July 18, 2007 edition

Page 1 of 2

San Francisco - Medicare Part D makes it easier for America's elderly to buy prescription drugs. It also gives drug companies a free ride on the backs of the next generation.

Social Security and other entitlements already threaten the nation's fiscal health. So why would Congress make Medicare Part D a landmark in corporate welfare? It may be a financial debacle, but it's a lobbyist's dream. Part D is a multibillion-dollar entitlement for the pharmaceutical industry that taxpayers will be underwriting for the rest of their lives, or until Congress fixes it, whichever comes first.

The White House and Congress claimed the private structure of the program would lead to lower drug prices. In fact, since the program began last year, the opposite has happened, thanks to the lobbying wizards of K Street. A fragmented band of more than 1,400 Part D insurance plans has had little negotiating power with the drug companies. Nor do those plans have much reason to bargain: Part D subsidizes patients on extended and expensive medication regimes at 80 percent.

Most remarkably the bill that Congress pushed through in 2003 didn't let the government negotiate drug prices. Why? Because the US Department of Health and Human Services (HHS) got no authority to define the "formulary" list of drugs for which Medicare will pay. Absent a credible threat to drop from that list any overpriced drugs that have branded alternatives – which the vast majority has – the government lost its negotiating stick.

Surprise! No price competition. So drug companies were able to raise rates for brand-name medications (that have comparable alternatives, but for which there are no generics) at twice the rate of inflation in the first six months of the program. And together, the five largest drug firms enjoyed a 45 percent increase in profits over the prior year.

This year, prices under Medicare private insurance plans for 10 of the most prescribed brand-name drugs (that have comparable alternatives) shot up an average of 6.8 percent in just four months.

The drug company comrades-in-armchairs should compete for their margins like everybody else, not be propped up by nonnegotiable government overpayments. Instead, analysts estimate that this congressionally sanctioned price support program, unmolested by market forces, will result in at least $30 billion in windfalls to drug companies in the next decade.

Page 1 | 2 | Next Page