The Magazine

A Bush Success (not that he gets credit)

The Medicare drug benefit is working better than predicted.

Apr 28, 2008, Vol. 13, No. 31 • By JAMES C. CAPRETTA and PETER WEHNER
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The protracted political struggle over the future of American health care stems in large part from a fundamental disagreement over what should be done to address the seemingly inexorable rise in costs.

On one side of the debate are the governmentalists. They argue that the only reliable way to control costs is heavy regulation. They would use the government's power to set prices for services below market rates and to impose restrictions on total spending, both of which would effectively limit the number of willing suppliers of services (doctors, nurses, hospitals, clinics, and product manufacturers).

There is plenty of evidence from around the world to show what would happen in the United States if a federal agency were given this kind of power. In Europe and Canada, costs are unquestionably lower than here. Yet waiting lists, outright rationing of care, quality problems, and general patient dissatisfaction are widespread. Politicians in these countries are under just as much pressure from a restless public as are American politicians to deliver a better product at lower prices.

Is there a better way--one that would improve efficiency and slow cost escalation while encouraging higher quality care and medical breakthroughs?

Pro-market reformers have long contended that, with the right policies, health care could operate more like other sectors of the economy, with strong price and quality competition rewarding those market participants who improved productivity while also satisfying the consumer.

For years, governmentalists have been able to dismiss the arguments of market reformers as nothing more than theoretical dreaming, with insufficient real-world evidence to back up the claims. Of course, all the while, governmentalists opposed every effort to give market forces a chance to work.

But that all changed with enactment of the Medicare prescription drug benefit. While congressional governmentalists, led by Senator Hillary Clinton, fiercely opposed the bill's passage because it included the introduction of unprecedented levels of competition, the bill passed in December 2003.

The governmentalists were right about one thing: The new drug benefit is unquestionably designed to encourage market competition. But on everything else, they were mistaken.

The drug benefit's market-based tilt is not complicated. Medicare beneficiaries choose every year from among competing, privately run drug-coverage plans. The government's contribution toward this coverage is set at a fixed percentage of the average premium, and no more. If beneficiaries want to enroll in a plan that costs more than the average, they can do so--but they, not the government, must pay the additional premium.

This structure provides strong incentives for the drug coverage plans to secure discounts from manufacturers and encourage use of lower cost products over more expensive alternatives. Drug plans that fail to cut costs risk losing enrollment to cheaper competitors.

Still, the governmentalists found this design wanting and predicted failure. Their argument was that private insurers wouldn't offer coverage, so the price competition would be weak. Costs would soar without government-set price controls. Beneficiaries wouldn't sign up because the premiums would be too high. The program would collapse under the weight of a public yearning for government-run simplicity.

On all these points, the governmentalists were wrong.

Now in its third year, the drug benefit is working better than predicted. More than 1,800 private plans are competing for enrollment. More important, Medicare beneficiaries like the program. Recent independent surveys show 85 percent are satisfied with their coverage. And little wonder: In 2008, the average beneficiary premium is just $25 per month, well below the original estimate of $41.

The program's competitive design is holding down costs for the government as well. The Centers for Medicare and Medicaid Services announced earlier this year the new drug benefit's costs will be 40 percent--or $244 billion--less over ten years than originally projected. This is an unprecedented achievement in health care policy.

There are important lessons to draw from this experience. For liberals it is that the greatest threat to public support for their ideology is reality. It's been said that you can prove the possible by the actual--and in this case, the "actual" is that sensible public policy can liberate markets to work in health care just as they work in every other area. Governmentalists have a deep interest in grounding policy debates on issues like health care in abstractions and appeals to fear of the unknown. Pro-market reformers, on the other hand, need only to test their propositions against reality.