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Drug Benefit: Keep a Taut Rein

March 18, 2001

New federal budget estimates that prescription drug costs are soaring 30% higher than previously projected mean Congress cannot be too careful in figuring out how to add a prescription drug benefit to Medicare. Legislators must keep the challenge of containing costs front and center.

In the presidential campaign, George W. Bush proposed having states manage drug programs for the low-income elderly and having managed care plans offer coverage for other Americans. However, in recent months President Bush's plan has been looking increasingly unfeasible. Most governors, many with budgets in deficit, have made it clear that they don't want to be stuck managing a new entitlement program, especially for something as prone to runaway price inflation as prescription drugs.

Managed care plans aren't racing to offer prescription drug coverage either: In fact, scores of Medicare HMOs--private plans that offer an alternative to traditional Medicare, usually including supplemental drug coverage--have pulled out of the market in recent months because of cost overruns, stranding nearly a million people this year alone.

Finally, surveys show that American seniors are increasingly uneasy about the idea of having states or HMOs take over their Medicare benefits. They prefer the perceived security of the federal program.

All of these trends show that the wisest course is to have the Health Care Finance Administration--the agency that runs Medicare and Medicaid--manage the new prescription drug benefit, using its immense market clout to negotiate bulk price discounts, as Australia, Canada and many other developed nations have done.

Thomas A. Scully, whom President Bush plans to nominate as director of the Health Care Finance Administration, is an experienced former official of the Office of Management and Budget. Scully should ensure that basic prescription drug packages are limited to drugs whose efficacy has been proved in independent clinical trials.

Congress can help Scully by following a recommendation issued by the federal Institute of Medicine earlier this month to commit $1 billion over five years to begin a national effort to determine which drugs and other medical treatments are the most cost-effective.

Senate Judiciary Committee Chairman Orrin G. Hatch (R-Utah) too can help rein in drug prices by making good on his promise to fix flaws in the 1984 Hatch-Waxman prescription drug patent law. That law was intended to foster competition between generic and brand name drugs, but, as both of its authors now acknowledge, prescription drug companies have used it as a tool to delay competition and artificially boost prices.

While Congress should be careful to adequately fund prescription drug coverage, its key challenge will be to develop mechanisms to keep costs from soaring in the future.

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