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Recipe for a better bill

Harold Meyerson thinks the House's health-care reform bill is not only better policy, but better politics as well.

For families who buy their insurance on the exchanges that both bills establish, for instance, the House bill includes more generous subsidies -- on average, $1,000 more, according to the Congressional Budget Office. The House bill also offers a lot more assistance to Medicare recipients by reducing the cost of their prescriptions. While the bill that emerged from the Senate Finance Committee renews the Bush administration's megabucks gift to the drug companies by continuing to prohibit Medicare from negotiating drug prices with them, the House bill authorizes those negotiations. The Senate bill reduces by half the payments that Medicare recipients must make for prescription drugs that fall into the "doughnut hole" (annual drug expenses are covered up to $2,700, and coverage kicks in again at $6,100, but for all purchases in between, Medicarians are on their own). The House bill would cover all prescription purchases by 2019.

The House bill is not only better public policy than the Senate's, it is also better Democratic politics. Seniors always constitute a disproportionate share of midterm electorates, and Democrats concerned about next year's congressional contests would do themselves a major favor by passing a bill that reduced the costs of seniors' medications. Max Baucus and Rahm Emanuel may have cut a deal with the pharmaceutical industry that limits the cost-cutting the industry will undertake (in return for the greater profits it will gain by having more insured Americans to whom it can sell drugs), but no one in the House ever signed on to it. When the two bills go to conference, the conferees should note that the House version not only bends the nation's cost curve downward but tilts the Democrats' electoral prospects upward.

I prefer the subsidies in the House bill, the public option in the House bill, and the funding mechanism in the Senate bill. The Senate pays for health-care reform by slapping a surtax on high-value plans offered by employers. Economists almost universally believe that such a tax will do quite a bit to control costs and increase wages, both of which are overriding priorities. More on that tax here.

That said, the Senate's excise tax is too small to fund health-care reform, and it's likely to get smaller. So I'd like to see some of the House funding mechanisms blended into the bill to increase the total subsidies. Pair the Senate's excise tax with a cap on itemized deductions, or a surtax on income over $1,500,000, and you'd have more than enough money for generous subsidies. That would make the bill affordable and help it control costs. Good policy, in other words, alongside good politics.

By Ezra Klein  |  November 4, 2009; 4:35 PM ET
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Your thoughts make a lot of sense. Meyerson's, not so much.

The "Medicare negotiates on their own" has been consistently demonstrated to have negligible impact on costs, as the PBMs that currently conduct negotiations have pretty good leverage already. So, wrong on that policy. As are his cost implications of "doughnut hole" coverage, but that's a topic for another day (which the CBO is getting wrong, by the way.)

On the politics question, I think its hardly good politics to piss off the only industry sector (drug) that has both the money and organization to really cause trouble for reform. If you're of the belief that Americans are well-informed on the issues many would have concerns over-- specific mandate penalties, impact of guaranteed issue on premiums for the 175 million in the employer group market (read: Gruber's intentionally misleading analyses on the individual market are not relevant), the agreement among health policy experts that the legislation lacks real cost control, and a couple of other juicy political hot potatoes-- if you think the public is aware of all of that, then no need to worry about a $50 million ad campaign after reneging a deal with PhRMA. If you think that Dems are fortunate to have skated by on these issues because industry groups have been effectively bought off thus far-- then pissing off PhRMA is not good politics.

Posted by: wisewon | November 4, 2009 4:52 PM | Report abuse

wisewon--You think if Medicare were able to negotiate directly with manufacturers, as a single entity, it wouldn't result in a better deal than paying a slew of PBMs to be the middlemen. As someone posted earlier, you're going to have to show your work on that one, bro.

I agree however that Obama doesn't have the guts to break his deal with PhRMA. He wants his supporters to get behind the House bill, and then he's going to do a bait-and-switch on them in conference. You watch.

Posted by: bmull | November 4, 2009 5:09 PM | Report abuse

"Economists almost universally believe that such a tax will do quite a bit to control costs and increase wages, both of which are overriding priorities."

I hope so but I worry that a lot of the excise tax thinking backs into 'rational actor' assumptions; as well as the assumption that benefit managers and employers make good decisions. Also, just as most of those plans will be union plans, remember that labor agreements could be in place dictating any number of factors in how those newly-more-expensive plans are implemented.

Posted by: ThomasEN | November 4, 2009 5:30 PM | Report abuse

Since most economists and many pundits support adding new financial burdens on the majority of people in this country by taxing their health care benefits, they should lead the way, as the first groups required to pay taxes on their health care coverage.

Posted by: Aprogressiveindependent | November 4, 2009 7:32 PM | Report abuse


There is an advantage, but its small. PBMs are a middleman, but have margins of 1 to 2%. They have 40 to 80 million covered lives, so they've got plenty of leverage. Most importantly, there have been a number of analyses on this question. Spend 10 minutes on the CBO website, they've answered this question from Democratic congressman a number of times. Same answer each time. Its a small effect. Obama's presidential campaign health policy paper had the same finding as well.

Posted by: wisewon | November 4, 2009 7:36 PM | Report abuse

I don't know. All I found was this from Peter Orzag when he was CBO director: "The authority to establish a formulary, set prices administratively, or take other regulatory actions against firms failing to offer price reductions could give the Secretary the ability to obtain significant discounts in negotiations with drug manufacturers."

Posted by: bmull | November 4, 2009 10:38 PM | Report abuse


I'm not sure if you are having this discussion in good faith or not-- I'll give you the benefit of the doubt-- did you read the whole paragraph that was excerpted from?

"By itself, giving the Secretary broad authority to negotiate drug prices would not provide the leverage necessary to generate lower prices than those obtained by PDPs and thus would have a negligible effect on Medicare drug spending. Negotiation is likely to be effective only if it is accompanied by some source of pressure on drug manufacturers to secure price concessions. The
authority to establish a formulary, set prices administratively, or take other regulatory actions
against firms failing to offer price reductions could give the Secretary the ability to obtain
significant discounts in negotiations with drug manufacturers. In the absence of such authority, the Secretary’s ability to issue credible threats or take other actions in an effort to
obtain significant discounts would be limited. Broad negotiating authority would not necessarily
result in the type of targeted approach that could produce savings. CBO thus estimates that
providing broad negotiating authority by itself would likely have a negligible effect on federal

Perhaps you misunderstand the context of the one sentence you've excerpted from this paragraph. The other things Orszag mentions-- formularies, administrative pricing-- are different than "negotiating directly."

Formularies are restrictions which Congress hasn't allowed to date, so the Medicare Part D formulary rules are extremely generous (multiple drugs per class), giving PBMs or Medicare little negotiating leverage as is typically used. Administrative pricing aren't negotiating but fixing prices, which is a different tactic altogether. That would involve requiring drug companies to provide the medicines at a given price (presumably otherwise generic companies would be permitted to ignore patents and other regulatory protections) regardless of whether drug companies felt the price is fair or not. Its very different than the "take it or leave it" Medicare reimbursement rates with providers. This type of pricing-- which is used for Medicaid-- isn't on the table for Medicare. Perhaps that's the confusion.

So what Orszag is saying here, and others have said elsewhere, is that just simply giving CMS negotiating authority isn't going to provide more leverage than PBMs already have. Unless you do something else in ADDITION to negotiating authority.

Posted by: wisewon | November 5, 2009 7:29 AM | Report abuse

If legislators were really serious about controlling pharmaceutical expenses, they would start by banning mass marketing of prescription drugs to consumers. They would also prohibit the co-pay rebate programs drug companies use to subvert insurers' efforts to encourage consumers to use less expensive alternatives. Both tactics drive consumption of expensive drugs that have little or no medical benefit over competitive products.

We may not know how much Medicare could save if it were able to negotiate prices but we do know that the status quo does not contribute to controlling costs.

Posted by: Athena_news | November 5, 2009 6:51 PM | Report abuse

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