Paying Dearly for Free Prescription Drugs

As Congress finalizes plans to expand Medicare, more and more seniors are beginning to understand that “free” prescription drugs from the government will carry a very high price tag.  The tragedy is that our society is allowing the pharmaceutical industry, phony senior lobbies, and vote-hungry politicians to force millions of older Americans into a government-run Medicare ghetto.

All of us, including seniors, will pay for the drug benefit in the form of higher taxes.  Congress claims the program will cost $400 billion over the next 10 years, but government cost projections cannot be trusted.  Medicare today costs seven times more than originally estimated.  Private economists estimate the true cost will be closer to $3 or $4 trillion over ten years, but even the government’s figure of $400 billion represents the largest entitlement increase since the failed Great Society programs of the 1960s.  This new spending comes as the Treasury faces record single-year deficits, which soon will approach $1 trillion annually. 

The biggest losers under the new program are the 76% of seniors who already have some form of prescription drug coverage.  On average, these seniors spend less than $1,000 per year on drug co-payments and meeting deductible amounts.  Under both the House and Senate proposals, however, millions of American seniors will end up paying more out-of-pocket for drugs than they do now, while having worse coverage.

Furthermore, the Medicare drug benefit gives private companies a perverse incentive to dump their existing prescription coverage and force retirees into the government system.  Many large companies already have badly underfunded pension plans.  As more and more Baby Boomers retire, these companies will face serious financial crises.  They will naturally seek to cut costs by eliminating drug coverage; some companies already have announced their intention to do so when the Medicare drug benefit becomes available.  In fact, the Congressional Budget Office estimates that at least one-third of all retirees will lose their private drug coverage and becomes wards of Medicare.

Prescription drugs are tremendously expensive, but the solution is not a wasteful new one-size-fits-all government drug entitlement.  To lower drug prices, we must eliminate government interference that prevents healthy free-market price competition.

First and foremost, we must eliminate the middleman in health care.  The HMO Act of 1973, coupled with tax rules that do not allow individuals to use pre-tax dollars to pay for health care, combine to force millions of Americans to deal with HMO and Medicare bureaucrats.  Whenever a third-party stands between a doctor and his patient, health care becomes inefficient and expensive.  Individuals should be able to decide with their doctors what drugs are appropriate, and then reduce their taxable income dollar-for-dollar for all drug expenditures.  By forcing employers to offer HMOs and prohibiting individuals from paying for drugs with pre-tax dollars, government enables drug companies to set high prices for deep-pocket middlemen.

The Food and Drug Administration is also directly responsible for high drug costs. Pharmaceutical companies spend hundreds of millions of dollars to bring a single drug to market because of FDA rules.  Often FDA approval is never obtained, no matter how much a company spends developing a drug. So pharmaceutical makers naturally try to recoup their huge investments by charging high prices and lobbying to keep exclusive drug patent periods as lengthy as possible.  We need to understand that the FDA does far more harm than good, both in terms of drug prices and the incalculable chilling effect it has on needed drug research.  With less FDA interference, patents could be shortened and drug development costs reduced.  This would allow greater price competition between drug companies.

The new Medicare drug plan enriches pharmaceutical companies, fleeces taxpayers, and forces millions of older Americans to accept inferior drug coverage.  It does nothing, however, to address the fundamental reasons prescription drugs cost so much.