Medicare Part D, the prescription-drug benefit program for seniors, has cost the federal government considerably less than was initially estimated. It's also overwhelmingly popular among beneficiaries. But in Washington, Part D is now a prime target for overhaul. In the heat of debate over the debt ceiling, President Obama and a group of lawmakers have proposed lowering the deficit by eliminating one of the very things about Part D that makes it such a success.
That thing is competition. Part D works—and stands out among federal entitlement programs—because it harnesses market forces to save money for the government and beneficiaries. Drug companies compete for the right to sell their drugs to the private insurers who participate in the program. Those private insurers, in turn, compete to offer their plans to the Medicare enrollees.
The result is a program that cost 32% less than the Congressional Budget Office's original estimate. The competitive bidding process—aided, in part, by patent expiration of brand drugs—drives down the costs to both the beneficiaries and the taxpayers.
Some policy analysts dismiss the argument that medical innovation is driven by profits. But the facts tell the opposite story. Lack of potential profits is exactly the reason why diseases that afflict poor countries receive few R&D dollars.
Venture capital funding for the biotechs that kick-off research for new drugs is completely contingent on strong signs of profitability in terms of intellectual property, disease prevalence and reimbursement. The government's proposed price controls will ultimately cause some of this funding to dry up entirely.
This is the rerun of a much too familiar story: The more a government gets involved in paying for care, the more it will use its power as a big buyer to force down prices to providers. This has already happened in other parts of Medicare and many European countries. For the U.S., this story will not end as happily.