By Carter Bundy
Last week I promised I’d provide a little of the math behind how we can save hundreds of billions of dollars with an Obama administration and Democratic filibuster-proof Senate, simply by changing one part of one law.
Allowing Medicare D to negotiate for bulk purchasing rates, a core fiscal conservative principle if there ever was one, will do just that.
Volume, volume, volume
A few facts: Medicare D is going to be by far the largest consumer of prescription drugs anywhere in the world. Also, the marginal cost of making each pill for most drugs is almost de minimis. Ingredients, energy and other overhead, packaging, marketing and distribution won’t amount to more than a few pennies per pill.
The real costs in pharmaceuticals are in R&D, marketing, insurance and the up-front manufacturing investments in plants, all of which are fixed or nearly-fixed costs.
We all want pharmaceuticals to make money and keep churning out great products — it helps avoid surgeries and prolongs life. Because of the low marginal cost per pill, as long as they increase volume dramatically, they make a killing. That’s precisely what Medicare D will do.
Medicare math
The math on Medicare D can be tricky, and can be dependent on what type of drugs you use and what plan, but let’s take a simple version: You start by paying $35/month premiums, and picking up the first $250 with your deductible.
Then Medicare picks up 75 percent of the next $2,150 above the $250 deductible.
So if you use $100/month, or $1,200/year, you pay $670+(25 percent x $950=$237.50)=$907.50 of the $1,200, or 75.6 percent. Of that, the taxpayer picks up nearly $300.
As you use more, Medicare — or, more accurately, the taxpayer — picks up more. Let’s say you use exactly the amount that maximizes your benefit: $2,400. That means you pick up $670 + $537.50 (which is 25 percent of $2,150). That’s $1,207.50, or almost exactly 50 percent.
For the consumer, not bad — quite a bit better than paying the full retail price with no discount. But the taxpayer is forced to fund a $1,200 subsidy to pay pharmaceutical companies the highest retail prices in the world.
Why is the taxpayer stuck with that bill? Because Steve Pearce, Heather Wilson and George Bush all prohibited Medicare D from doing what any other government agency or business in the world can do: negotiate bulk discounts to reflect the sellers’ savings from economies of scale.
It gets worse for consumers: After $2,400 per year, you get to the donut hole, all the way to $5,100. Between $2,400 and $5,100, all costs are on the consumer. That means of the first $5,100, consumers picked up almost 80 percent of the cost. That’s not a great discount, particularly when it’s calculated off of a non-negotiated price. And the taxpayer still has a $1,200 bill.
The cost of the taxpayer subsidy is $600 billion over 10 years, all to save seniors somewhere between 20 percent and 50 percent off non-negotiated prices.
Purchasing power
The VA, a much, much smaller purchaser of drugs, gets about a 25 percent discount for its bulk purchases. Given the enormity of the new volume of Medicare D business, and knowing the incredible margins to be made on each pill, any pharmaceutical worth their salt would be willing to negotiate at least a 50 percent discount to get Medicare D’s business.
That requires zero taxpayer subsidy, other than the salary of the Medicare employees who negotiate the contracts. You could make an argument that the administrative costs of Medicare D would be a few million, but let’s put all doubts aside and say the administrative costs for Medicare D ran all the way into the hundreds of millions per year. Heck, let’s call it a billion.
Opening up negotiations yields a better deal for most seniors than they currently have –with competent negotiators, they’d all get a 50 percent discount instead of as little as 20 percent under the current system.
Yet the taxpayers’ burden would be reduced from $60 billion/year to $1 billion/year. Even the pharmaceutical companies would still make more than they ever dreamed of because the low marginal costs of each pill means increased volume goes straight to the bottom line. Everyone wins, especially taxpayers.
Learning from history
Three items alone guarantee a better likelihood of returning to fiscal sanity under Obama rather than McCain: 1) Medicare D savings, 2) drawing down in Iraq, and 3) re-instituting tax rates for the very richest Americans equal to or lower than those under most of Reagan and Clinton (when the wealthy and investors did extremely well, by the way).
You may have other reasons for voting GOP this year, but if you’re a fiscal conservative, Obama has far more credible and sound plans to reduce our deficits. We’ve already tried the Bush/McCain route of tax gifts to millionaires and multi-billion dollar companies, and that’s precisely what caused most of our deficits.
Won’t Obama invest the savings in health care instead of paying down the deficit? Not entirely. Remember, we already pay for indigent health care in emergency rooms, more sick people, lost work days, lower productivity and higher chronic disease costs.
Obama understands that investing in health and education yields more, both economically and in quality of life, than the penny-wise, pound-foolish McPalin policies of putting each family out into the insurance market on their own by taxing employer-based health plans.
Take away the benefits of employer-based pooling (remember economies of scale above? Similar concept in pooling), and weaken consumer protections, as McCain pledges to do, and
Want to stop wasting taxpayer dollars on well-connected mega-corporations? Want fiscal sanity? Want to put our money into paying down the deficit and making investments in areas that yield terrific returns? This year, the fiscal conservatives are Democrats, exemplified by level-headed Barack Obama.
Bundy is the political and legislative director for AFSCME in