We’re talking about Medicare and especially how its prescription drug policies fail seniors. In Part I of this series, healthcare economist John C. Goodman told us some little-known facts about Medicare:

• Medicare was the last major insurer to cover drugs
• Medicare drug coverage reflects politics, not rational insurance principles

Today, we continue this series with some more facts about Medicare from Mr. Goodman:

Medicare requires three premiums for three different insurance plans.

If you’re a senior, you’re probably paying separate premiums to three different insurers: one for Part B coverage for doctor’s visits, a second for Part D coverage for drugs, and a third for Medigap insurance to plug the holes in Part A (hospital care) and Part B. Yet, because the suppliers of these three plans have differing financial interests, the results are waste, inefficiency and inferior patient care.

Consider the effect of having one insurer cover drugs, while the other two are covering medical care. If a diabetic skips his insulin and other medications, that is actually profitable for the drug insurer – since they don’t have to cover the cost of the insulin. However, this noncompliance with taking insulin probably leads to emergency room visits, even hospitalization, if the diabetic’s blood sugar goes hayward. These additional costs will be borne by the other two insurers. Since the differing insurers have differing financial interests, there is no possibility of alignment with the goal of cost-effective, well-managed care.

Medicare creates perverse incentives to tax the sick for the benefit of the healthy.

When insurers are forced to charge community-rate (charging the same premium regardless of health status) and there is no adequate risk adjustment, they will have an incentive to overcharge the sick (to discourage enrollment) and undercharge the healthy (to encourage their enrollment).

In Medicare Part D, this perverse incentive leads to distorting effects in the “rebate” system. For example, say a diabetic goes to a pharmacy where the list price of insulin is $100. Her 25 percent copayment amounts to $25. However, unbeknownst to her, the insurer is getting, say, a $90 rebate from the drug company that produces the insulin. That means the real cost of the insulin to the insurer was only $10, so a fair out-of-pocket charge to the patient would be only $2.50, not $25.

What happens to that “profit,” which the insurer makes but doesn’t share with the patient? It gets competed away by charging lower premiums for buyers of Part D drug insurance. In this way, the system causes the sick who need drugs to be overcharged while the relatively healthy premium payers are undercharged. Is there a better way?

How the private sector differs from Medicare.

It’s that time of the year when Medicare enrollment is open so we’re all seeing ads for Medicare Advantage plans. Roughly half of all Medicare enrollees are participating in the Medicare Advantage program – where they enroll in private plans that look very much like the plans employers offer. Although these plans are regulated by the Medicare bureaucracy, they have enough freedom and flexibility to avoid some of traditional Medicare’s worst features.

If you enroll in Medicare Advantage (MA), you pay only one premium to one insurer, who is responsible for all costs. That means the insurer has a non-conflicted, integrated interest in keeping patients health and in minimizing costs. These plans have just as much economic incentive to attract the sick as the healthy. So, instead of a rebate system, these plans pass along any discounts from drug producers to the patients – and even more so.

For example, in the Houston area Aetna, Cigna, Anthem, and Oscar insurance plans all offer MA plans that make maintenance drugs for the chronically ill completely free or available at a very nominal fee. A diabetic would tend to pay nothing for insulin and other drugs and would have access to an endocrinologist at no charge or for a $5 copay. That’s because the plans believe that by lowering these costs to the patients they are avoiding the higher costs of severe illness.

Goodman concludes, “Given the freedom to so, private health care and private health insurance can meet patient needs far more effectively than health plans operated and directed by government.”

Author’s note: If you’re considering enrollment in a Medicare Advantage plan, be sure your doctors are participating providers in the plan before you sign up. Not all physicians who accept Medicare will also accept the MA plan you want.

Democrats are bragging about lowering Medicare prescription drug prices. I’ve talked about the downside of that policy in recent blogs (The Real Cost of Lowering Drug Prices, Cancer Drug Breakthroughs Threatened). But there are many other reasons why Medicare is failing seniors.

John C. Goodman, healthcare economist writing in Forbes, asks us to consider how well Medicare stands up against private, free-market provision of similar services. Since Congress just acted on Medicare prescription drugs, let’s examine drug coverage in answering that question. He makes the following points:

Medicare was the last major insurer to cover drugs.

Medicare was created in 1965 and at that time the benefit structure was simply a copy of the standard Blue Cross plan being sold at that time. Since Blue Cross didn’t cover drugs, Medicare didn’t cover drugs. At the time drugs played a very small role in the healthcare system and they weren’t that expensive in any event.

All that has changed, however. Today we are getting our best healthcare return from spending on drugs. The benefits per dollar of cost from drug therapy are much higher than benefits from doctor or hospital therapies. The increase in life-expectancy that we have seen over those years has been largely due to new and effective drugs. These drugs have helped to lower the cost of healthcare while improving patient outcomes. As a result, since 2003 virtually every major health plan in the country now covers prescription drugs and has been doing so for a long time. Yet, Medicare was well into its fourth decade with no drug coverage – and it took a major effort in Congress to get coverage even then.

Medicare drug coverage reflects politics, not rational insurance principles.

While businesses respond to opportunities to lower costs and improve service, Medicare does not. Goodman says, “Whether it is auto insurance, home insurance or any other kind of insurance, certain principles usually govern insurance contracts. In general, people self-insure for small expenses which they can easily afford on their own and rely on third-party insurance for large expenses which could be financially devastating.”

But Medicare does not follow that principle. In fact, it turned that principle upside down. Whether the service was doctor, hospital, or drugs, Medicare traditionally has paid many small expenses that seniors could easily afford on their own, while leaving them exposed for tens of thousands of dollars of catastrophic costs.

Why the difference? In any insurance scheme, a small percent of the insured will make up a very large percent of the claims in any given year. In health insurance, for example, about half the money is spent on 5 percent of the insured. When the insurer is the government, that means that half the money will be spend on 5 percent of the voters – people who may be too sick to vote at all!

Here’s where socialized medicine systems figure into the equation. When a minister of health is allocating healthcare dollars, such as Britain or Canada, there is intense political pressure to take from the few who are sick and spend money on the many who are relatively healthy. These same political realities have affected Medicare.

Anyone who had used Medicare for drug coverage is familiar with the “donut hole.” After a certain point, Medicare pays less for drugs than it has been paying – until a patient’s costs reach another threshold and catastrophic coverage kicks in. The reason for this “donut hole” is to create a benefit for the many seniors with small drug costs. That benefit is “paid for” by making the few seniors with high drug costs pay more out of their own pockets. That’s also the reason why a very small number of seniors pay $10,000 or more every year for specialty drugs while the typical senior pays only 25% of the cost of inexpensive drugs.

(Next post – Part II of this series on Medicare.)

Liberals believe the government is the solution to all problems. In keeping with this thinking, the Biden Administration wants to take the credit for a new Alzheimer’s drug they had nothing to do with.

The Wall Street Journal editorial board rightly reminds us that President Barack Obama declared that businesses owed their success to the government. “You didn’t build that,” he said. No, that business you started in your garage years ago and built into a successful enterprise was really not your success – it was the government’s success.

Now, the National Institutes of Health is claiming credit for Biogen’s new Alzheimer’s treatment that showed success in a large trial last week. “Potentially promising outcomes such as this one are the result of sustained public investment in medical research, the tireless work of scientists around the world, and the help of people living with Alzheimer’s and their caregivers,” the NIH wrote in a press release this week.

You might think the NIH funded the study – but you would be wrong! Although the NIH didn’t fund the successful study, it says its “decades of research paved the way” for it. Next thing you know they’ll want not only the credit but the royalties.

WSJ says, “Sorry. The Biogen drug’s apparent success is mainly the result of sustained private investment in drug research and development over many decades that has resulted in dozens of failures and billions of dollars in investment write-offs. Biogen may finally recoup some of its investment with its new Alzheimer’s drug, if the Biden Administration will let it.”

It has long been believed that Alzheimer’s disease is caused by the buildup of proteins called amyloid in the brain. Many scientists believe that removing amyloid from the brain could slow cognitive decline. But the long line of failed amyloid treatments has prompted skepticism by some. Many dismissed Biogen’s first-in-class amyloid drug Aduhelm despite positive results from one late-stage trail because another trial showed mixed results.

The Food and Drug Administration (FDA) approved Aduhelm based on the totality of evidence. But Medicare refused to pay for it and other anti-amyloid treatments that might win accelerated government approval outside of clinical trials because it wasn’t convinced that removing amyloid can slow the disease. Last I checked, it wasn’t the job of Medicare to decide if drugs are effective – that’s the FDA’s job.

Biogen’s new drug is called Lecanemab. There is evidence this drug can remove amyloid and even the NIH seems to agree. Lecanemab slowed the rate of cognitive decline by 27% over 18 months, similar to Aduhelm. In order to claim credit for this success, the NIH says, “government funding was integral to helping us understand the role of amyloid, the protein targeted by lecanemab.”

But WSJ says Biogen and other drug makers took the risk of investing multiples of that in experimental treatments with no guarantee that it would ever pay off. It was Biogen who decided to screen patient brains specifically for amyloid in their trials, yet NIH even tries to claim credit for this revelation, writing that the “selection of participants for lecanemab clinical trials hinged on amyloid PET imaging, a technology that was developed with publicly funded research.”

If you think this argument is all about money, you’re right. The NIH is essentially claiming intellectual ownership of Biogen’s drug. WSJ asks, “Will the NIH also demand inventor rights to Biogen’s patents so it can earn royalties on its drug sales, as it did with Moderna for its Covid-19 vaccines because its scientists contributed to coronavirus vaccine research?”

The Biden Administration loves to paint drug makers as greedy and unconcerned about patients. The recently passed “Inflation Reduction Act” allows the government to place price controls on drugs covered by Medicare, which will only lead to fewer new drugs like lecanemab. (The Real Cost of Lowering Drug Prices) It seems this government wants it both ways – credit for lowering drug prices and credit also for those drugs developed without their funding. Now who’s greedy?