The Challenges Of A Medicare Drug Benefit

PROLOGUE: Sigmund Freud, a shrewd and perhaps compulsive observerof human nature, recognized in an early work that the cost ofpsychoanalytic care should be high enough that the patient feltthe pinch because, he reasoned, patients will value that forwhich 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 transcendsthat on the ego and the id. Today the challenge of pinpointingthe "appropriate" price for health care, particularly the increasinglyprominent prescription drug component, is engaging the bestminds in the business. Players in a grand game of "The PriceIs Right," policymakers, legislators, and lobbyists competeto provide the authoritative figure on the value of a prescriptiondrug benefit for Medicare beneficiaries. Should a Medicare drugbenefit spare or share the pain; will a benefit help meet criticalneeds or lead to overuse? If the pain is shared, will therebe adequate incentive to develop new drugs? Are new drugs worththe price?

In the papers that follow, eminent economists Joseph Newhouseand Mark Pauly explore these questions with their usual acumen.Newhouse raises the specter of government price setting to controlpossible abusive pricing but advises that this be a measureof last resort. Distinguishing between the demand price—theprice that the patient pays—and the supply price—theprice received by the pharmaceutical company—he outlinesapproaches to calculating each with particular focus on thesupply price. This is the flip side of the discussion of howmuch seniors will pay for their drugs, and it highlights someof the major incentives for the pharmaceutical industry. Costsare an integral element of any drug-pricing equation, and Newhouseanalyzes several methods to calculate these. His paper is accompaniedby a Perspective by Uwe Reinhardt, who reiterates his proposalfor a federally funded drug information infrastructure firstput forth in these pages nearly two years ago. A second Perspectiveby Ernst Berndt, a Massachusetts Institute of Technology–basedeconomist, delves more deeply into some of the issues Newhouseraises. Newhouse is the John D. and Catherine T. MacArthur Professorof Health Policy and Management at Harvard University.

Pauly looks at how a Medicare drug benefit might affect druguse among seniors in the aggregate and in those groups thatlack any drug benefit. Interestingly, in addition to questioningwhether a new benefit would result in more appropriate druguse or just more use overall, he touches on a drug benefit’spotential impact on Medicare’s longer-term ability tocover other medical expenses and procedures. Pauly is the BendheimProfessor and Chair of the Department of Health Care Systemsat the University of Pennsylvania’s Wharton School.

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The Challenges Of A Medicare Drug Benefit