Tuesday, June 27, 2006

Quantity Discounts

Are neat things. You can save a bit of money by buying in bulk. The same principle should apply to larger entities than individuals and households, and indeed it does. The Democrats are proposing to use this simple principle in the Medicare prescription drug program:

Think about the advantage when you're negotiating on behalf of 43 million elderly and disabled Americans. That's the image painted by Democratic lawmakers who want the federal government to negotiate drug prices on behalf of Medicare recipients.

The Democrats envision using the money that is saved to close a gap in coverage, called the "doughnut hole," that will affect an estimated 6.9 million people this year.

The "doughnut hole" is defined in the same article:

Under the standard drug benefit, the government subsidizes the drug costs for seniors and the disabled. But after costs reach $2,250, the subsidy stops until a beneficiary has paid out $3,600 of his or her own money. That's the gap called the doughnut hole. Then, the government will start picking up 95 percent of each purchase.

This doesn't make any sense at all. From a medical point of view those who are more seriously ill will have greater drug expenses. Why suddenly raise these expenses, after first subsidizing them? Some patients might stop taking their medications when the prices rise, and some of these could get a lot sicker or even die. And if the "doughnut hole" is intended to discourage medication use as a money saving device, why then reintroduce the subsidies at even higher levels?

In any case, the Democrats' proposal is based on the idea that the mass purchasing power of the government would let much lower prices be negotiated than the current system of market competition but with a ban on such overall negotiations. On the other side, the proponents of the administration plan argue that the system is already cheaper than estimated:

After early challenges, the Bush administration has hailed the drug benefit as a tremendous success. The competition among insurers has resulted in monthly premiums that average less than $24 a beneficiary, versus original estimates of $37.

Meanwhile, the estimated cost of the program has dropped by about $180 billion over the coming decade, from $926 billion to $746 billion, Health and Human Services Secretary
Mike Leavitt said in a report about two weeks ago.

"One size does not fit all, especially when dealing with the health care needs of an aging population," Leavitt said.

Hmm. But it's not one size of drugs that the bulk purchase proposal advocates, just one set of discounts. The Canadian experience suggests that centralized purchasing could produce considerable additional savings. Of course the Republicans are unlikely to try something like that, given their distrust of the government. The pharmaceutical companies wouldn't like it, either.