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Pelosi's pet issue.; Private Lesson

`This vote was stolen from us by the Republicans," seethed HouseMinority Leader Nancy Pelosi following passage of President Bush'sMedicare drug benefit in November 2003. She was referring to theegregious effort by the GOP leadership to keep the vote open untilthey achieved a majority--three hours of browbeating, arm-twisting,and even alleged bribery that culminated in a razor-thin victory inthe wee small hours of the night. But she might just as well havebeen talking about the issue itself.

For years, House Democrats had called for adding a prescription-drugbenefit to Medicare, while Republicans had resisted. Now, followingthe White House's lead, the GOP had finally embraced a drugbenefit--and it bore little resemblance to what Democrats had inmind. They had envisioned a benefit administered directly by thegovernment, just like the original physician and hospital insuranceportions of the program. Instead, under the GOP proposal, privateinsurers would do that job. As a result, the Democrats said, theprogram would cost more, and cover less, than necessary.Particularly distressing was a "donut hole" in the coverage thatleft seniors exposed to thousands of dollars in out-of-pocketexpenses. But, at the time, there was precious little the Democratscould do apart from fume.

Now, however, they are poised to put their words into action. Aspart of the six-point agenda Pelosi has promised to deliver in thefirst 100 hours of the new Congress, the Democrats have said theywill repeal part of the Medicare drug package--specifically, aprovision that prohibits the government from negotiating pricereductions with drug companies. This change probably won't do muchto bring down drug prices right away. But it will be the first shotfired in a political war that should have been fought long ago andis sure to get hotter in the next two years: whether government orthe private sector is best- suited to delivering health insurance.

Until recently, the issue of whether government should run Medicare,in particular, was largely settled. The whole reason the programeven existed was that, by the 1960s, it had become clear thatprivate insurance was ill-suited for the elderly, given theirmyriad health problems. But, in the mid-'90s, when Newt Gingrichand the Republicans took over Congress, they unleashed a frontalassault on the program, proposing to transform it into a system ofcompeting private insurance plans--a change that would have erodedthe basic guarantees of health security that Medicare provides.Members of the Clinton administration and many other Democrats,while not willing to go that far, shared Gingrich's belief thatprivate insurance--primarily in the form of HMOs-- could help makeMedicare more efficient. That consensus led to the creation of aprogram called "Medicare+Choice," which allowed seniors to opt outof Medicare and enroll in an HMO.

The HMOs were a hit at first, since they offered more benefits thantraditional Medicare. But that initial rush partly reflected thefact that commercial insurers were underpricing their plans in theearly stages to build market share--and that they were, in effect,gaming the system by drawing off healthier Medicare beneficiarieswho didn't run up large bills. Once the government cut back thereimbursements to reflect this, the insurers began to drop out orreduce their benefits.

The most important benefit HMOs had offered was drug coverage, whichtraditional Medicare lacked. So the failure of "Medicare+Choice"prompted conversations about creating a more comprehensive drugbenefit that would be available to all seniors. But Republicans(and some Democrats) continued to insist that the private sectorcould deliver insurance to the elderly more efficiently than thegovernment could. And, in 2003, they got their way-- enacting thelaw we have today. Under its provisions, seniors can get drugcoverage by signing up for a managed-care plan (as they couldbefore), or they can purchase a stand-alone plan that willsupplement their basic Medicare. Either way, the drug coveragecomes from private insurance.

Perhaps not surprisingly, the health care special interests thathave helped finance Republican campaigns make out quite nicelyunder this scheme. The insurance companies, for example, aregetting overpaid again--by as much as 25 percent, according to somestudies. But the biggest winner has been the pharmaceuticalindustry. The law not only means more opportunities to sell itswares; it also means that the government won't meddle in drugcompany practices or pricing. Indeed, to ensure thatpharmaceuticalmakers weren't subject to excessive regulatoryoversight, the law's architects inserted language explicitlyprohibiting the government from negotiating for lower drug prices.

In other countries, it is precisely such government meddling thathas reduced the price of drugs to well below what Americanconsumers--and U.S. insurance companies--pay for them. And that iswhy Pelosi and the Democrats have proposed to revisit theprovision. On its own, striking the noninterference language wouldnot affect drug pricing. It would merely give the secretary ofHealth and Human Services the authority to take action-- somethingthat's unlikely to happen as long as Bush is in office.

But a future administration could use such authority. The governmentcould, for instance, insist on lower prices for certain populardrugs. (The drug- makers could refuse, but then they wouldpotentially lose the government's business--a huge market.) Itcould also create a formulary system, with lists of drugs for whichit would either pay in full, pay in part, or not pay at all-- andbase inclusion on price or quality or, ideally, both. The Departmentof Veterans Affairs (V.A.) has a formulary system that many expertscite as a model, in part because it has held down drug prices muchbetter than the private sector. Dean Baker, an economist at theliberal Center for Economic and Policy Research, has estimated thatswitching to a system of government- negotiated prices would savemore than

$40 billion a year. That's probably optimistic, but even smallersavings could help create a more comprehensive drugbenefit--thereby filling part of the "donut hole"--or provide cashfor other spending priorities.

That may explain why the pharmaceutical industry and its allies areemphasizing other arguments against Pelosi's proposal--chief amongthem that having the government involved in drug pricing will leadto fewer medical breakthroughs (by reducing the drug companies'ability to invest in research) or will result in restricted accessfor patients who need life-saving medications. It's a potentargument: People may not like it when life-saving drugs areexpensive, but they're likely to be even more spooked by theprospect that the drugs won't be made available to them or may noteven exist.

This argument has several flaws, starting with what we know abouthow Americans use prescription drugs. Reams of statistical datasuggest Americans are routinely using expensive drugs forconditions that either don't need treatment or could be treatedmore cheaply with different medications. A big reason for this isthe marketing practices of the pharmaceutical industry, which usesjunkets and other less-than-savory practices to push their wares ondoctors while blitzing the airwaves with TV advertisements to drumup demand among consumers. A classic case of this--recountedvividly in Merrill Goozner's book The

$800 Million Pill--was the development of and heavy promotion behindNexium, a drug from AstraZeneca that treats acid reflux. It isvirtually identical to Prilosec, which AstraZeneca also produces.Right before Prilosec's patent expired, making it much cheaper(because generic drugmakers could now produce their own version),AstraZeneca heavily advertised Nexium as the next- generation pilland provided free samples so that people could try it--even thoughthe vast majority of people with reflux would have done just aswell sticking with Prilosec.

In fact, as Goozner and other industry critics have shown, the mostimportant basic medical and scientific research that leads to majormedical breakthroughs usually takes place under governmentauspices--typically, through grants from the National Institutes ofHealth. In other words, taxpayers--not drug companies--are the onesfinancing the most important drug research today. So, even if thepharmaceutical industry did reduce its research and developmentinvestment because of declining revenues, what we'd lose probablywouldn't be the next cure for cancer--it would be the nexttreatment for seasonal allergies, and likely no better than theones we have already.

Drug-makers also caution that, if the government adopts formularies,they would block access to necessary drugs for severely illpatients. But private insurers--including the ones now servingMedicare beneficiaries--use formularies, too. And studies of theV.A. formulary by both the Government Accountability Office and theInstitute of Medicine found no evidence of access problems.

The last line of defense for drug-makers is that the currentMedicare program is working, so why mess with it? And, in fact, theprogram has operated more smoothly since its famously rocky startlast January, when mass confusion reigned and thousands of elderlyseniors couldn't get their drugs covered. But these problems wereas much about program implementation as design. The more seriousconcern has always been about the program's long-termsustainability-- and its cost. There's every reason to suspectthat, like the Medicare HMOs of the '90s, the private insurers nowrushing into the Medicare business will gradually start to dropout--particularly since some of the law's provisions, designed toprotect companies in the early going, will expire starting in 2009.And, even to the extent that the program does continue to work, itwill only be at an unreasonably high expense, thanks to all theunnecessary subsidies for the insurance and pharmaceuticalindustries.

For now, simply striking the noninterference language makes sense asa first step. Such a measure should have unanimous support (orsomething very close to it) among the Democratic caucus, accordingto Hill staffers and strategists from both parties. And an evenstronger bipartisan measure in the Senate, sponsored by OlympiaSnowe and Ron Wyden, has already garnered the support of 54members. Given the Democratic gains, it is likely to pass theSenate.

That would land the bill on Bush's desk, where he would have twounappetizing options. If he vetoes it, Democrats could wield theissue against Republicans, the same way they did against NancyJohnson and Clay Shaw this fall. (Both veteran House members losttheir seats.) And, if Bush signs it, Democrats would get to holdoversight hearings. Either way, they would get a chance to put thisissue on the public agenda and generate support for transformingthe Medicare drug program into something closer to what theyoriginally had in mind. Along the way, they would get to hammer awayat another, broader point: that, when it comes to financingAmericans' medical expenses, often the government really is betterthan the private sector. That's just as true for the working-agepopulation as it is for the elderly--a point worth making wheneverthe next debate over universal health care begins. If Pelosi hasher way, it could begin as soon as next year.