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Health Affairs, 23, no. 1 (2004):
88
doi: 10.1377/hlthaff.23.1.88 © 2004 by Project HOPE |
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Medicare Challenge |
The Challenges Of A Medicare Drug Benefit
PROLOGUE: Sigmund Freud, a shrewd and perhaps compulsive observer of human nature, recognized in an early work that the cost of psychoanalytic care should be high enough that the patient felt the pinch because, he reasoned, patients will value that for which they have paid dearly. His clientele was typically well-to-do, if not well adjusted. Freud has been both venerated and pilloried, but his insights on pricing might reflect a truth that transcends that on the ego and the id. Today the challenge of pinpointing the "appropriate" price for health care, particularly the increasingly prominent prescription drug component, is engaging the best minds in the business. Players in a grand game of "The Price Is Right," policymakers, legislators, and lobbyists compete to provide the authoritative figure on the value of a prescription drug benefit for Medicare beneficiaries. Should a Medicare drug benefit spare or share the pain; will a benefit help meet critical needs or lead to overuse? If the pain is shared, will there be adequate incentive to develop new drugs? Are new drugs worth the price?
In the papers that follow, eminent economists Joseph Newhouse and Mark Pauly explore these questions with their usual acumen. Newhouse raises the specter of government price setting to control possible abusive pricing but advises that this be a measure of last resort. Distinguishing between the demand price—the price that the patient pays—and the supply price—the price received by the pharmaceutical company—he outlines approaches to calculating each with particular focus on the supply price. This is the flip side of the discussion of how much seniors will pay for their drugs, and it highlights some of the major incentives for the pharmaceutical industry. Costs are an integral element of any drug-pricing equation, and Newhouse analyzes several methods to calculate these. His paper is accompanied by a Perspective by Uwe Reinhardt, who reiterates his proposal for a federally funded drug information infrastructure first put forth in these pages nearly two years ago. A second Perspective by Ernst Berndt, a Massachusetts Institute of Technology–based economist, delves more deeply into some of the issues Newhouse raises. Newhouse is the John D. and Catherine T. MacArthur Professor of Health Policy and Management at Harvard University.
Pauly looks at how a Medicare drug benefit might affect drug use among seniors in the aggregate and in those groups that lack any drug benefit. Interestingly, in addition to questioning whether a new benefit would result in more appropriate drug use or just more use overall, he touches on a drug benefit’s potential impact on Medicare’s longer-term ability to cover other medical expenses and procedures. Pauly is the Bendheim Professor and Chair of the Department of Health Care Systems at the University of Pennsylvania’s Wharton School.
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