An out-of-pocket cost comparison of Medicare prescription drug coverage (Part D) vs. an alternative (BCBS) prescription drug plan shows Part D to be expensive.

Q. The presdription drug benefit was described as a poison pill at the time. Does it require funding?

A. More than just a poison pill, it’s a giveaway to the pharmaceutical industry to increase the cost of medicine.

Why Medicare Part D was called a Poison Pill

In politics, a poison pill, or “wrecking amendment,”involves attaching an amendment to a bill that is so distasteful that even the bill’s supporters are forced to vote against it, intended to simply kill the bill, or to create a no-win situation for the bill’s supporters, so that the bill’s opponents can accuse them of voting for something bad no matter what. It may also refer to a stipulation often attached to constitutional amendments, which kills the amendment if it has not been ratified after seven years.

During the Reagan-Bush 1980s and the first years of the 1990s, in fact, Medicare was predicted to go bankrupt within fifteen years. Medicare Part D was said to have been intended to be a poison pill for the purpose of killing off Medicare. Medicare Part D was designed to deprive the government of the right to negotiate wholesale drug prices, which would deplete Medicare of over $600 billion in the next decade and hand it over to about a dozen big drug companies.

The Background of Part D: Medicare did not include a prescription drug benefit, and most years in the 1980s and 1990s saw double-digit increases in drug prices, far outstripping inflation rates and the rise in overall health care costs. In 1995, the Heritage Foundation launched a $30 million media campaign about Medicare reform, proposing a market-based system, modeled on the Federal Employees Health Benefits Program, in which the government would subsidize private insurance and managed-care companies in providing benefits. This public-private model was used for the new drug benefit, Part D. It isn’t an entitlement program provided by the government, but one subsidized and nominally run by the government in which people buy prescription drug insurance policies from private companies.

Still, the pharmaceutical companies and their legion of Republican politicians also flatly opposed Part D in the early stages of its development during Bill Clinton’s term. When pharma giants realized that the plan could be implemented on their terms, they understood that they stood to increase drug sales. By the time of Bush’s Part D proposal the pharmaceutical industry embraced it on the condition that took the form of privatized delivery. Drug companies, insurance companies, HMOS, industry trade associations, and advocacy groups spent more than $140 million on lobbying, deployed at least 952 lobbyists, according to a 2004 Public Citizen report. Their biggest priority was to prevent a system in which the government had the power to negotiate drug prices, as it does in purchases for the Department of Veterans Affairs, the Department of Defense, and the Public Health Service. Dr. Sidney Wolfe, director of Public Citizen’s Health Research Group says:

Drug company lobbyists were unbelievably successful in getting a sentence put in the legislation saying the government cannot negotiate or set prices. And once you had that, it became pure privatization, a free-enterprise system.

In other words, Part D ties the government’s hand to negotiate rates with providers. Health plans like Medicare negotiates what it will pay hospitals and doctors, so why not do the same for drugs? According to Wolfe: “They just bowed over to the pharmaceutical industry.”

How Part D Enables Private Sector Profiteering

Under the 2003 law, prices and “formularies”—the lists of which drugs are covered according to different “tiers” of coverage—are set by the individual companies that offer Part D plans. Each company makes its own deals with drug manufacturers for discounts in the form of rebates to the companies, not the consumers. There’s little real competition among the insurers, and to the extent they are able to squeeze discounts out of the manufacturers, they go straight to their own bottom lines and not to consumers.

One of the Medicare Modernization Act’s biggest handouts to the drug industry was its reclassification of 6.2 million low-income elderly and disabled people who had been receiving drug coverage through the Medicaid program. The new law forced these people into Part D, and now the government subsidizes the same drugs at higher prices. According to the 2007 House report, that change alone stood to increase drug company profits by an estimated $2.8 billion in 2007.

In an investigation last October, the House Committee on Oversight and Government Reform found that in 2007:

  • Discounts negotiated by private plans under part D reduced overall drug spending by only 8%.
  • The Medicaid program, where the government buys drugs directly, cuts costs a full 26% via rebates.

The Cost to Taxpayers

Part D Trust: The Part D account had $49.4 billion income in 2008. Premiums paid by beneficiaries and by states accounted for $12.1 billion income. $37.3 billion, or 75.5% of revenues, comes from federal general revenues. Unlike the HI trust fund, Part D funds do not depend on payroll taxes or investment interest. Funding is flexible, allowing increases in premiums and transfers of federal revenues as needed.

Funding Projections: The Medicare Board of Trustees estimates that Part D program costs, which were $49.3 billion in 2008, will increase from $66.2 billion in 2010 to $140.9 billion in 2018. Premiums will have to increase from the current national average of around $47. Federal funding will need to rise from $50.7 billion in 2010 to $107.8 billion in 2018.

The Cost to the Federal Deficit

Bruce Bartlett writes in Forbes that U.S. Comptroller General David Walker has called he Medicare drug benefit “the most fiscally irresponsible piece of legislation since the 1960s.”

Recall the situation in 2003. The Bush administration was already projecting the largest deficit in American history–$475 billion in fiscal year 2004, according to the July 2003 mid-session budget review…Recall, too, that Medicare was already broke in every meaningful sense of the term. According to the 2003 Medicare trustees report, spending for Medicare was projected to rise much more rapidly than the payroll tax as the baby boomers retired. Consequently, the rational thing for Congress to do would have been to find ways of cutting its costs. Instead, Republicans voted to vastly increase them–and the federal deficit–by $395 billion between 2004 and 2013. However, the Bush administration knew this figure was not accurate because Medicare’s chief actuary, Richard Foster, had concluded, well before passage, that the more likely cost would be $534 billion. Tom Scully, a Republican political appointee at the Department of Health and Human Services, threatened to fire him if he dared to make that information public before the vote. (See this report by the HHS inspector general and this article by Foster.)

 He discusses the fact that there were still a few Republicans in the House of Representatives who wouldn’t vote for the bill just to buy re-election, so, when the legislation came up for its final vote on Nov. 22, 2003, it was failing by 216 to 218 when the standard 15-minute time allowed for voting came to an end:

What followed was one of the most extraordinary events in congressional history. The vote was kept open for almost three hours while the House Republican leadership brought massive pressure to bear on the handful of principled Republicans who had the nerve to put country ahead of party. The leadership even froze the C-SPAN cameras so that no one outside the House chamber could see what was going on.Among those congressmen strenuously pressed to change their vote was Nick Smith, R-Mich., who later charged that several members of Congress attempted to virtually bribe him, by promising to ensure that his son got his seat when he retired if he voted for the drug bill. One of those members, House Majority Leader Tom DeLay, R-Texas, was later admonished by the House Ethics Committee for going over the line in his efforts regarding Smith. Eventually, the arm-twisting got three Republicans to switch their votes from nay to yea: Ernest Istook of Oklahoma, Butch Otter of Idaho and Trent Franks of Arizona. Three Democrats also switched from nay to yea and two Republicans switched from yea to nay, for a final vote of 220 to 215. In the end, only 25 Republicans voted against the budget-busting drug bill. (All but 16 Democrats voted no.)

According to Bartlett, Part D added $1 trillion to the deficit:

Just to be clear, the Medicare drug benefit was a pure giveaway with a gross cost greater than either the House or Senate health reform bills how being considered. Together the new bills would cost roughly $900 billion over the next 10 years, while Medicare Part D will cost $1 trillion. Moreover, there is a critical distinction–the drug benefit had no dedicated financing, no offsets and no revenue-raisers; 100% of the cost simply added to the federal budget deficit, whereas the health reform measures now being debated will be paid for with a combination of spending cuts and tax increases, adding nothing to the deficit over the next 10 years, according to the Congressional Budget Office. (See here for the Senate bill estimate and here for the House bill.)

Bottom Line: A Trail of Corruption and Reduced Outcomes

Who’s To Blame?: When people talk about the red tape of government bureaucracies, it might be worthwhile considering the real truth of the matter, and where the rhetoric originates.  One may argue that the government is inefficient and corrupt, but not without acknowledging the source of the corruption and greed: the private sector. The forces that began the privatization of Medicare, starting with Part D, created an unnecessary burden on citizens in the form of higher prescription drug costs, and federal budget increases to benefit a few large pharmaceutical companies.

Trail of Corruption: Consider the following political payoffs:

  • Former Congressman Billy Tauzin, R-La., who steered the bill through the House, retired soon after and took a $2 million a year job as president of Pharmaceutical Research and Manufacturers of America (PhRMA), the main industry lobby group.
  • Medicare boss Thomas Scully, who threatened to fire Medicare Chief Actuary Richard Foster if he reported how much the bill would actually cost, was negotiating for a new job as a pharmaceutical lobbyist as the bill was working through Congress.
  • A total of 14 congressional aides quit their jobs to work for the drug and medical lobbies immediately after the bill’s passage.

Reduced Outcomes: Paul Krugman, compared patients in the Medicare Advantage plans, which are administered by private contractors with a subsidy of 11% over traditional Medicare, to the VA system. Citing the Medicare Payment Advisory Commission, he found:

  • Mortality rates in Medicare Advantage plans are 40% higher than mortality of elderly veterans treated by the V.A

The “Donut Hole” In 2012, the plan requires Medicare beneficiaries whose total drug costs reach $2,930 to pay 100% of prescription costs until $4,700 is spent out of pocket. (The actual threshold amounts will change year-to-year and plan-by-plan, and many plans offer limited coverage during this phase.)  This coverage gap affects about 25% of beneficiaries enrolled in standard plans.

The ACA addresses this coverage gap by reducing costs for recipients from 100% to 50% of these expenses. However, instead of saddling the government and the taxpayers with the cost, the cost of the plan would be borne by the drug manufacturers for name-brand drugs and by the government for generics.

Additional Reading

Medicare’s Poison Pill

The Big Picture: Thom Hartman Exposes The History of “We’re Going Broke.”

Wikipedia: Medicare Part D

Forbes: Republican Deficit Hypocrisy