Scenario in Senate Bill: Drug Rationing

By slashing Medicaid’s budget, the health-care bill would lead to prescription price controls.

Senate Republicans may not realize it, but their repeal-and-replace health-care legislation, if passed, would set the U.S. on the road to European-style price controls and rationing of prescription medications. This would follow fairly directly from the enormous cuts to Medicaid that the bill would impose.

By 2026, according to the Congressional Budget Office, federal spending on Medicaid would be reduced by 25 percent. And the cuts would build further every year thereafter.
Starting in 2025, the federal reimbursement to states for each person covered by Medicaid would rise only at the rate of overall inflation — far less than the rise in medical costs for those beneficiaries. Consider that, over the coming decade, spending per person on Medicaid is expected to grow by about 4.5 percent annually, while the overall inflation rate is projected to be more like 2.5 percent. A per capita cap that increases only at the rate of inflation would thus amount to a cut in federal spending on Medicaid of about 2 percent a year.

After a couple decades of this — on top of the cuts through 2026 — federal support for Medicaid would be cut to about half the level it would be without this legislation.

How would states respond? The CBO says they “would continue to need to arrive at more efficient methods for delivering services (to the extent feasible) and to decide whether to commit more of their own resources, cut payments to health care providers and health plans, eliminate optional services, restrict eligibility for enrollment, or adopt some combination of those approaches.”

One specific and perhaps underappreciated thing states could do would be to aggressively restrict Medicaid beneficiaries’ access to drugs, and impose price constraints on the medicines allowed.

This would come as a blow to both beneficiaries and drug manufacturers, because Medicaid is the largest insurer in the country. In 2015, it spent about $30 billion on retail prescriptions for its 70 million beneficiaries — about 10 percent of the national retail drug spending total.

The per capita caps would also affect state incentives to cover newly discovered breakthrough drugs. Currently, under Medicaid, state governments pay only a fraction of the cost of such medicines, typically well under 50 percent. (The exact share depends on the state’s per capita income and the type of beneficiary involved.) The rest of the cost is paid by the federal government. Even with this generous federal cost-sharing, state governments still often balk at covering new drugs.

Most states have been reluctant to pay their share of drugs to treat hepatitis C, for example, and have instead significantly limited access to only those patients who meet specific conditions. Waves of lawsuits have been filed to push states to provide more generous access to the medicines.

Now imagine what would happen with a per capita cap on federal spending. Any new drug entering the system whose costs had not been anticipated would have to be borne entirely by the state. A governor choosing whether to pay the full freight or, say, hold down tuition at public universities might well decide that access to the drugs should be limited, even if the drugs are a major clinical breakthrough or could reduce other health-care spending over time.

Under the existing Medicaid drug rebate program, states are required to cover nearly all drugs from manufacturers that have signed rebate agreements. But they nonetheless restrict access — by establishing preferred drug lists and prior authorization rules, and by rigidly limiting the number of prescriptions a beneficiary can fill each month. These techniques would probably be used more and more under a per capita cap. And governors would dial up the pressure on Congress to loosen the requirement to cover all drugs — and allow states to ration them directly through highly restrictive or closed formularies based primarily on cost rather than value.

States have already become more aggressive in negotiating extra rebates from drugmakers, in addition to the federal Medicaid rebate. A new law in New York promises extra state scrutiny of profit margins and drug effectiveness for any company that doesn’t agree to sufficient rebates. If the Senate health-care bill becomes law, such measures would probably become more widespread, as states struggle to accommodate Medicaid drug costs.

The likely result of the legislation would thus be to push state governments to aggressively set prices and ration access to new drugs. To be sure, the U.S. needs to shift drug payments in a way that places more emphasis on value. But loading more risk and cost onto fiscally strapped state governments is not the way to do it. I wonder whether Republicans, who generally espouse less government interference in drug pricing, understand what forces their bill would set in motion.

Originally published at on June 28, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.


Saving Money on Cardiac Care

The federal government’s own actuaries are once again pessimistic that America’s health-care costs will continue their slow growth. Thankfully, their boss, Sylvia Burwell, the secretary of Health and Human Services, is working hard to prove them wrong. On Monday, she took another big step in the right direction.

Medicare costs this year are up only 4 percent, which means that on an inflation-adjusted basis, spending per beneficiary is declining. And that’s been the pattern of the past five years — despite the actuaries’ repeated predictions that cost growth is on the verge of picking up.

From Bloomberg View – Articles by Peter R. Orszag

This Isn’t ‘Big Data.’ It’s Just Bad Data.

With response rates that have declined to under 10 percent, public opinion polls are increasingly unreliable. Perhaps even more concerning, though, is that the same phenomenon is hindering surveys used for official government statistics, including the Current Population Survey, the Survey of Income and Program Participation and the American Community Survey. Those data are used for a wide array of economic statistics — for example, the numbers you read in newspapers on unemployment, health insurance coverage, inflation and poverty.

From Bloomberg View – Articles by Peter R. Orszag

Let Veterans Get Civilian Medical Care

I disagree with pretty much everything Donald Trump has ever said. But in calling for veterans to have more options on their doctors and hospitals, he’s got a point. Imagine, for example, the outrage if military veterans were able to receive subsidized health care at the clinic or hospital of their choosing, but were then forced into a separate system of run-down, inconveniently located facilities. If the next administration rejects proposals to reform the Veterans Health Administration and instead perpetuates the current system, the effect will be the same.

from Bloomberg View – Articles by Peter R. Orszag

Clinton’s Shrewd Plan to Stop Inversions

Political campaigns are not generally known as ideal laboratories for devising sensible, innovative policies. Yet Hillary Clinton’s proposals to combat corporate inversions — in which U.S. companies move their tax homes abroad — are just that. They would largely eliminate the tax incentives to invert.

A U.S. company currently has many such incentives. It can lower its taxes by creating a home base in a low-tax country, even if it leaves its headquarters and other operations in the U.S., and even if the U.S. operations represent as much as 79.9 percent of the new combined company (though the rules are stricter if the share is 60 percent to 80 percent).

from Bloomberg View – Articles by Peter R. Orszag

A Better Way to Educate Doctors

Just when it seems as if citizens everywhere are revolting against government, a county in Texas provides a vivid counterexample. In 2012, voters in Travis County approved an increase in their property taxes to help fund a new medical school at the University of Texas at Austin. The school illustrates that taxpayers are willing to support a project they believe is justified.

And this project — the Dell Medical School (it also has funding from the Michael and Susan Dell Foundation) — is well justified, because its curriculum breaks from tradition to address the challenges doctors increasingly face in the effort to improve the value of medical care.

Health care is undergoing surprisingly rapid transformation.

from Bloomberg View – Articles by Peter R. Orszag

People Aren’t Unequal; Companies Are

Wage inequality, according to one popular view, arises from differences in the talent and determination of individuals: Some superstars win, and everyone else does not.

What if the winning superstars aren’t people, however, but companies? Then if you’re working at one of those companies, you’re doing great, and if not — well, good luck.

Consider this: Capital returns at companies are diverging sharply, and the share of them that reap annual returns of more than 25 percent or even 50 percent is growing. This is what Jason Furman, chairman of the President’s Council of Economic Advisers, and I found in a study whose results are being released Friday. It’s plausible that some of those big returns are shared with the companies’ employees. And that may well be playing an important role in growing wage inequality.

from Bloomberg View – Articles by Peter R. Orszag