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Medicare’s Part D drug benefit is going to cost taxpayers a lot of money. A really, really lot of money.
You can find the story deep in the bowels of the Medicare Trustees report that was released earlier this week. It is a nice little case study of how a well-intentioned government program can add tens of billions of dollars annually to the federal deficit. And it is a cautionary tale of how hard it will be to bring medical costs under control, despite the promises of the Obama Administration and industry lobbyists.
Part D was adopted by Congress in 2003 and began to pay full benefits in 2006. When Congress passed the drug program, conservatives groused that it was too expensive, while liberals complained it was both too complicated and not generous enough.
Premiums finance only about 25 percent of the program’s cost—the rest is paid through general tax revenues. Unlike Part A hospital insurance, there is no payroll tax funding for this piece of Medicare.
For the past three years, benefits have been significantly lower than government actuaries first projected, in part because so few costly new drugs have made it on to the market. But don’t worry. That bit of fiscal good fortune is not likely to last long.
According to the actuary’s intermediate cost assumptions, Part D spending will nearly triple from about $50 billion last year to a staggering $140 billion in 2018. Per capita spending will more than double, from $1,500-a-year to almost $3,200. And the program’s long-run costs are even more troublesome: growing from about 0.4 percent of Gross Domestic Product in 2008 to 1.4 percent of GDP by mid-century to 1.8 percent by 2080. Yikes. That’s about 10 percent of what it has historically cost to run the entire federal government.
Just as troubling is the uncertainty of these estimates. While $140 billion is the mid-range forecast for 2018, the actuaries warn the cost could range from as low as $107 billion to as much as $180 billion. With admirable understatement, the trustees say, “there remains a very substantial level of uncertainty surrounding these costs projections.”
It is probably worth adding that these are net drug costs. Presumably, some of these medications will reduce other medical expenses by keeping people out of hospitals, and by avoiding surgeries and other costly treatments. That is surely an argument that the pharmaceutical industry will make when the White House asks it to do its part to trim medical expenses by 1.5 percent.
But how will we ever know? Reducing $140 billion by 1.5 percent would save only about $2 billion. And that is so far within the estimating error that it is little more than loose change under the statistical sofa cushions.
The drug benefit was a sensible reform. It was absurd that in 2003 Medicare was still offering health insurance that excluded pharmaceutical drugs. But those House conservatives were right about one thing: Part D will be hugely expensive. And we need to find a way to pay for it.
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