The Lesson of Medicare Part D

A Stitch In Time Saves Nine- The Lesson of Medicare Part D
By Thomas Cefalu- Staff Writer
1/23/2006

The more vociferous critics of President Bush, both the conservative and the liberal ones, remind me of the Borscht Belt joke that Woody Allen recounted in Annie Hall. Two vacationers in one of the Catskills resorts start comparing complaints about their hotel:

“Gee, the food in this resort is really terrible!”

“Yes, and such small portions!”

That about sums it up. The conservatives think his “compassionate conservative” policies are a terrible departure from ideological orthodoxy. And the liberals complain about how tiny the programs are compared to their ideal of huge government.

So it is encouraging when someone of the stature of Rich Lowry actually praises Medicare Part D in the august spaces of National Review.

He observes how the program has actually turned out to be quite cost-effective, with the average drug benefit down 40% from the original projections. Competition between insurance programs has lowered prices, while seniors are quite satisfied with a program that has produced a real tangible benefit for those on limited incomes. The Democrats are angry that the government is not “negotiating” (aka “setting”) prices, and point to the success of the Veterans Administration in holding down drug costs. But the VA does this by means of a national formulary- in other words, rationing. It restricts the availability of new drugs, and directs the patient pool to use older (and thus cheaper) drugs, thus limiting choice and potentially effectiveness.

In addition to the humanitarian benefits of Medicare Part D, there are strategic reasons to support it. For better or worse, the American people chose to have the federal government become the primary insurer of elderly people over forty years ago. At that time prescription drugs were a much smaller piece of the treatment pie than they have become with the phenomenal advances in drug therapy. Without a drug benefit, Medicare was in desperate need of modernization. And when things get desperate, that is when government overreacts and gets incredibly intrusive. The prudent man acts in a timely fashion now in order to prevent overreaction later.

Finally, Medicare is supported by taxes, and unlike Social Security, there is no limit on the income subject to the Medicare tax. Conservatives should take a leaf from the book of conventional tax planning. The program is here to stay, so how do we make sure it is effective while minimizing the cost? One of the core principals of tax planning is deferral: do not pay a tax now that can be legitimately paid later. Because of the medical effectiveness of prescription drugs and their relatively low cost compared to hospital treatment, the Medicare drug benefit can actually defer expenses, which is practically the same as deferring taxes. It is far better, financially and philosophically, for Medicare to pay $20 per month now for a man’s blood pressure pills than to pay the enormous up-front therapy costs of his stroke. It is better to pay $80 per month for insulin to control a woman’s diabetes than to pay for heart surgery or amputations resulting from same.

Demographic factors reinforce the need to avoid expensive hospitalizations. The Congressional Budget Office has noted that pressure on Medicare will grow as the numbers of elderly increase, especially with the looming retirement of the baby boomers. The pressure will intensify if medical costs continue to inflate faster than other costs of living. The CBO estimated that Medicare costs as a percentage of GDP will jump from 2.3 % in 2000 to 5.4% in 2030. Prompt action is needed to counter these demographic headwinds.

The punditry predicts that President Bush will propose other health care reforms in his 2007 State of the Union address. He certainly deserves a lot of credit for Medicare Part D, for initiating that stitch in time that will hopefully save nine. Rather than lambaste him for betraying conservatism, we should applaud the President for his strategic thinking. Or, as he might put it, “strategery”.