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.


What Trump Needs to Learn About Planes, Trains and Automobiles

Splashy new projects get the attention, but the real problem is with boring upkeep and operations.

The tensions between President Donald Trump and House Republicans over whether to enact a massive infrastructure bill have slipped from the news a bit, but we should expect that debate to re-emerge this spring and summer. In the meanwhile, while the topic is temporarily off the front pages, we have time to examine what should and shouldn’t happen — which is why I’m excited to participate in a conference that the Hamilton Project is holding on infrastructure today in Washington.

From Bloomberg View – Articles by Peter R. Orszag

Congress Needs a Megadeal

One way to tackle the debt limit, the budget, military spending and health care — all in September.

As Congress returns to work this week, its agenda is crowded with must-pass legislation. To avoid shutting down the government, lawmakers will have to vote for new spending bills. To avoid a debt crisis, they will have to increase the debt limit. To avoid depriving millions of low-income children of health insurance, they will need to reauthorize funding for it. And since the Trump administration on its own seems unwilling to make the Obamacare health-insurance exchanges work more effectively, Congress will need to make some fixes.

From Bloomberg View – Articles by Peter R. Orszag

Republicans Will Find Corporate Tax Reform Isn’t That Easy

Legislating can be so much more challenging than it seems during an election campaign. That’s becoming increasingly clear about Republican promises to repeal and replace Obamacare. And it’s about to become clearer on corporate tax reform.

Tax reform is a relatively easy concept: Most people favor lowering the tax rate and closing loopholes. The difficulty is in the details.

From Bloomberg View – Articles by Peter R. Orszag

Education and Taxes Can’t Reduce Inequality

Very often, proposals to even out income inequality advise one of two things: Expand people’s access to education and/or raise the top tax rates. Yet even a big increase in the share of people with a college degree would have only a minimal effect on earnings inequality, research has shown. And now it turns out that a substantial increase in the top marginal tax rate wouldn’t do any better.

The economists Bill Gale and Melissa Kearney (colleagues of mine at the Brookings Institution) and I recently looked into the tax-rate question and found that even a big increase in the marginal tax rate for top earners would have shockingly little effect on after-tax inequality.

From Bloomberg View – Articles by Peter R. Orszag