diet coke for breakfast

Wednesday, June 11, 2003

Posted by Jake
Bush Prods Congress on Medicare (

On Why This is a Bad Plan

Someone in the government has to say when. Someone in the government has to say, no this is not going to work and we are not going to have the money.

The Democrats and Republicans (inscrutably) have decided to provide a "universal" prescription drug benefit for seniors, setting up another entitlement in a society with a great many already. This instead of a more targeted drug coverage for the poor advocated by the President.

Why won't this work? Why should all seniors be entitled to a drug coverage?

Contrary to popular belief, the government's money does not appear de novo. And as more and more baby boomers become seniors the cost is going to increase. The 400 billion dollars projected doesn't cover the half of it. We are getting ourselves into a cost situation not unlike European countries where aging populations and extensive pensions mean that there are just not enough taxpayers to run the government.

What does the government do when costs increase? It can do one of two things: raise taxes or impose price controls. The first is unlikely to happen not only because it is politically repugnant but also because it would be economically stifling to raise taxes to the necessary degree. The other choice, and the more likely one in this situation, is price controls.

The government will lower the amount of reimbursement to drug companies, pharmacies, and doctors for services and goods. Because of the large nature of the shortfall, they are likely to lower the reimbursements in variety of services outside actual drugs. (Reimbursements incidentally are already a fraction of market value making most hospitals operate at a loss).

At this point, I bet a lot of people are saying: "Well, OK, so what's the problem? Doctors and pharmaceutical companies are rich. Tough shit for them."

Well, first those perceptions are wrong. Doctors are paid well but also are forced to deal with 200,000 dollars worth of school loans, crippling malpractice insurance, and limited reimbursement from Medicare and Medicaid (usually less than half a dollar per dollar of market value). Many people in private practice have trouble making ends meet. It is a good thing most doctors are not in it for the money because if they are they picked the wrong business. Pharmaceutical companies are also doing well overall. But in spite of the relatively small incremental cost of producing medicines, there is a huge (sometimes billion dollar) upfront cost in R&D for discovering and gaining FDA approval of new drugs that must be overcome before earning even a cent of profit.

More to the point, what happens when price controls are established? Historically we know that three things always happen when less than market value is delivered for goods. In the words of Thomas Sowell: Keeping prices lower than they would be under supply and demand produces shortages, quality deterioration, and black markets -- whether the price that is being controlled is that of food, housing, medical care or innumerable other things.

Drug companies, because they will no longer be reimbursed for what they make, will not produce as many pills and will be less likely to explore the possibilities of new medications. Doctors will be reluctant to provide the care because they will not be paid. Black markets in medicine and treatment will develop for those who are forced to wait. This is not unknown even now. In Great Britain, the "model" for some of universal coverage, some people are forced to wait for even necessary surgeries so long that either the surgeries are ineffective or they die of their illness.

Which brings me to my point. This is a bad plan. We cannot afford to have a culture of entitlement. They don't work, economically or morally. Only 22% of seniors lack prescription coverage now. We should target relief to those who need it while avoiding attempts for universal coverage.

Sorry for the long rant.


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