Currently 3.4 million Americans seniors covered by Medicare find themselves in a giant “doughnut hole,” but despite the tasty terminology, there’s nothing sweet about it.
The doughnut hole refers to a gap in prescription drug coverage under Medicare Part D. As David Hilzenrath explains, “…beneficiaries enter the coverage gap when their prescription tab hits $2,830, including both their share and the amounts paid by insurance. Once in the gap, they are responsible for 100 percent of the cost and must spend $3,610 of their money before qualifying for catastrophic coverage, which typically pays 95 percent of the cost.”
President Obama has pledged that the Patient Protection and Affordable Care Act will, “in the coming years… close the doughnut hole completely once and for all,” while also conceding that “it’s very expensive to close this doughnut hole…[, and] for us to close that right away would have blown a hole in the budget.”
The doughnut hole was bad policy to begin with, but no worse than the way Obamacare would close it. The plan calls for starting to fill the hole through a 50 percent discount on brand name medication—something pharmaceutical manufacturers will be expected to provide for senior citizens in the coverage gap. This half off discount is somehow supposed to come out of the pharmaceutical companies’ hides. But, as Hilzenrath points out, “The government does not control the underlying price; the law leaves that to the market.”
What does that mean? Say pharmaceutical drug Generican sold for $50 a bottle last year. Next year there should be a $25 discount, so a Medicare patient would only pay $25.
There’s nothing holding the original price at $50, so Generican could conceivably raise the price to $100 a bottle and then offer a $50 discount. Though this large of a price hike is unlikely, the important takeaway point is that the half off discount does not guarantee savings. There are real concerns that pharmaceutical companies will raise prices in the future to make up for lost profits.
Hilzenrath explains, “the government is trying to establish much lower prices than market forces alone produced,” but despite the sizeable risk of busting the budget, there are no guarantees that drug prices will stay down.
So, you can expect the politicians to belly up to the bar and reach for Ye Old Rotgut- Price Controls. Price controls, of course, don’t control costs. They merely shift them, and they shift them directly to consumers in the form of — shortages. With 4000 years of experience, we know how that really, really Bad Movie ends. If the true goal is to create a shortage of drugs, well, then this is a really, really great strategy.
This post was co-authored by Charlie Adair.