Obama plan to force 'rebates' into Medicare drug benefit will drive up costs for thousands of seniors
The risk to seniors' Medicare Rx costs

Chuck Kennedy/White House

President Barack Obama discusses health insurance reform legislation with Senate Minority Leader Mitch McConnell (R-Ky.) during the bipartisan meeting at Blair House in Washington, D.C., on Feb. 25, 2010.

Article Highlights

  • The White House is urging super committee to implement system of “rebates” in Part D—a term that’s cleverly misleading

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  • Part D is the one component of #Medicare that’s working well

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  • Higher product prices will translate into higher premiums. It’s basic, whack-a-mole economics. #Medicare

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The congressional debt reduction super committee is running out of time. It must not rush into a decision that will undermine the one part of Medicare that actually works.

The 12-member panel has the job of finding at least $1.2 trillion in federal budget cuts. And it has just a few weeks left to submit its plan to Congress.

"The so-called rebate isn’t a rebate at all. For a large number of Part D patients, it’s going to function as a tax." --Joseph AntosThe White House has a plan for generating some of that savings. It wants to slash spending in the Medicare Part D prescription drug benefit.

President Obama seems to think this is a no-brainer, under the theory that it’ll only claw back money from drug companies.

But Part D is the one component of Medicare that’s working well. Because of the way the program is structured, America’s seniors get excellent coverage at a low price. Taxpayers get a program that consistently outperforms expectations and has been under budget since it began.

That’s not good enough for the White House, which is urging the super committee to implement a system of “rebates” in Part D.

That term is cleverly misleading. It brings to mind the cash-back coupons you might get for a TV at the electronics store.

But these rebates will actually wind up increasing program premiums for many seniors.

In Medicaid, drug makers are already required to provide a drug rebate — meaning, they are forced to sell their products at substantially below market rates to states.

The White House says that extending that system to the drugs sold to low-income seniors through Medicare’s Part D would generate $135 billion in savings over the next decade.

What they fail to say is that you can’t simply force firms to sell their drugs at lower prices without consequences.

Rebates aren’t free.

After Part D began in 2006, seniors got access to a larger choice of plans and enjoyed bigger savings than anyone expected. According to a 2009 Health Affairs study, prescription drug use among seniors increased, but out-of-pocket spending on drugs dropped by as much as 15% — thanks to Part D.

The biggest reason: competition. Unlike other elements of Medicare, private plans compete for seniors business under Part D. This year, seniors have access to more than 1,000 plans. On average, each state has 31 different options.

That competition has helped ensure that Part D premiums have run well below initial projections. By 2011, average premiums were expected to be above $52 a month. But this year, the average premium actually dropped for a second time. Seniors now pay $30 — a savings of over 40%.

If Congress were to impose Medicaid-style rebates for a slice of Part D population, drug makers will simply compensate by raising prices for the rest of patients. And those higher product prices will translate into higher premiums. It’s basic, whack-a-mole economics.

One study, for instance, estimates that installing rebates in Part D could cause the average program premium to increase by as much as 20%.

The so-called rebate isn’t a rebate at all. For a large number of Part D patients, it’s going to function as a tax. Forcing lower drug prices for a few will dramatically inflate health care costs for the rest.

Medicare is desperately in need of reform. The super committee is right to consider this program for budget cuts. But installing rebates in Part D is simply the wrong move. It will cause severe unintended consequences and higher drug premiums for millions.

Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI. He also is a commissioner of the Maryland Health Services Cost Review Commission and a health adviser to the Congressional Budget Office.


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