Government-regulated health care saves money

As faithful readers know, I’m always on the lookout for market failures, and health care consistently offers rich pickings. Most recently, courtesy of the President’s budget plan, I’m reminded of the failure of market competition to deliver lower drug costs under Medicare Part D.

Under Medicaid, drug manufacturers pay rebates to the government for the benefits they get (high volume orders) of participating in the program. When the Part D prescription drug bill was introduced, market freaks (backed by big Pharma) argued that competition between providers would provide lower costs than the Medicaid rebate approach. Under the new approach, each plan that sponsors Part D drug benefits negotiates specific rebates with drug manufacturers.

That’s where the magic of market competition is supposed to beat the clunky government. Except it doesn’t (and don’t be misled on this point). As the budget doc reports:

“…the Inspector General has found substantial differences in rebate amounts and net prices paid for brand name drugs under the two programs, with Medicare receiving significantly lower rebates and paying higher prices than Medicaid.”

By switching Medicare Part D over to the Medicaid rebate regime, we could save $135 billion over 10 years.

We keep doing this in health care, implementing policies that are supposed to tap competitive forces and constantly being surprised when they cost more than the regulated approach. Yet every other advanced economy has figured this one out and saves the equivalent of around 5-8% of GDP compared to us (while covering their whole populations with comparable or superior health outcomes–hat tip, PVdeW).

We would do well to learn this lesson the next time Rep Ryan or whomever starts going on about injecting market competition. That works much better for future options on pork bellies than it does for pain medication.