Tag Archives: Medicare Part D

Biden’s Rx Price Controls: Cheap Politics Over Cures

08 Tuesday Nov 2022

Posted by in Prescription Drugs, Price Controls, Uncategorized

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You can expect dysfunction when government intervenes in markets, and health care markets are no exception. The result is typically over-regulation, increased industry concentration, lower-quality care, longer waits, and higher costs to patients and taxpayers. The pharmaceutical industry is one of several tempting punching bags for ambitious politicians eager to “do something” in the health care arena. These firms, however, have produced many wonderful advances over the years, incurring huge research, development, and regulatory costs in the process. Reasonable attempts to recoup those costs often means conspicuously high prices, which puts a target on their backs for the likes of those willing to characterize return of capital and profit as ill-gotten.

Biden Flunks Econ … Again

Lately, under political pressure brought on by escalating inflation, Joe Biden has been talking up efforts to control the prices of prescription drugs for Medicare beneficiaries. Anyone with a modicum of knowledge about markets should understand that price controls are a fool’s errand. Price controls don’t make good policy unless the goal is to create shortages.

The preposterously-named Inflation Reduction Act is an example of this sad political dynamic. Reducing inflation is something the Act won’t do! Here is Wikipedia’s summary of the prescription drug provisions, which is probably adequate for now:

“Prescription drug price reform to lower prices, including Medicare negotiation of drug prices for certain drugs (starting at 10 by 2026, more than 20 by 2029) and rebates from drug makers who price gouge… .”

“The law contains provisions that cap insulin costs at $35/month and will cap out-of-pocket drug costs at $2,000 for people on Medicare, among other provisions.”

Unpacking the Blather

“Price gouging”, of course, is a well-worn term of art among anti-market propagandists. In this case it’s meaning appears to be any form of non-compliance, including those for which fees and rebates are anticipated.

The insulin provision is responsive to a long-standing and misleading allegation that insulin is unavailable at reasonable prices. In fact, insulin is already available at zero cost as durable medical equipment under Medicare Part B for diabetics who use insulin pumps. Some types and brands of insulin are available at zero cost for uninsured individuals. A simple internet search on insulin under Medicare yields several sources of cheap insulin. GoodRx also offers brands at certain pharmacies at reasonable costs.

As for the cap on out-of-pocket spending under Part D, limiting the patient’s payment responsibility is a bad way to bring price discipline to the market. Excessive third-party shares of medical payments have long been implicated in escalating health care costs. That reality has eluded advocates of government health care, or perhaps they simply prefer escalating costs in the form of health care tax burdens.

Negotiated Theft

The Act’s adoption of the term “negotiation” is a huge abuse of that word’s meaning. David R. Henderson and Charles Hooper offer the following clarification about what will really happen when the government sits down with the pharmaceutical companies to discuss prices:

“Where CMS is concerned, ‘negotiations’ is a ‘Godfather’-esque euphemism. If a drug company doesn’t accept the CMS price, it will be taxed up to 95% on its Medicare sales revenue for that drug. This penalty is so severe, Eli Lilly CEO David Ricks reports that his company treats the prospect of negotiations as a potential loss of patent protection for some products.”

The first list of drugs for which prices will be “negotiated” by CMS won’t take effect until 2026. However, in the meantime, drug companies will be prohibited from increasing the price of any drug sold to Medicare beneficiaries by more than the rate of inflation. Price control is the correct name for these policies.

Death and Cost Control

Henderson and Hooper chose a title for their article that is difficult for the White House and legislators to comprehend: “Expensive Prescription Drugs Are a Bargain“. The authors first note that 9 out of 10 prescription drugs sold in the U.S. are generics. But then it’s easy to condemn high price tags for a few newer drugs that are invaluable to those whose lives they extend, and those numbers aren’t trivial.

Despite the protestations of certain advocates of price controls and the CBO’s guesswork on the matter, the price controls will stifle the development of new drugs and ultimately cause unnecessary suffering and lost life-years for patients. This reality is made all too clear by Joe Grogan in the Wall Street Journal in “The Inflation Reduction Act Is Already Killing Potential Cures” (probably gated). Grogan cites the cancellation of drugs under development or testing by three different companies: one for an eye disease, another for certain blood cancers, and one for gastric cancer. These cancellations won’t be the last.

Big Pharma Critiques

The pharmaceutical industry certainly has other grounds for criticism. Some of it has to do with government extensions of patent protection, which prolong guaranteed monopolies beyond points that may exceed what’s necessary to compensate for the high risk inherent in original investments in R&D. It can also be argued, however, that the FDA approval process increases drug development costs unreasonably, and it sometimes prevents or delays good drugs from coming to market. See here for some findings on the FDA’s excessive conservatism, limiting choice in dire cases for which patients are more than willing to risk complications. Pricing transparency has been another area of criticism. The refusal to release detailed data on the testing of Covid vaccines represents a serious breach of transparency, given what many consider to have been inadequate testing. Big pharma has also been condemned for the opioid crisis, but restrictions on opioid prescriptions were never a logical response to opioid abuse. (Also see here, including some good news from the Supreme Court on a more narrow definition of “over-prescribing”.)

Bad policy is often borne of short-term political objectives and a neglect of foreseeable long-term consequences. It’s also frequently driven by a failure to understand the fundamental role of profit incentives in driving innovation and productivity. This is a manifestation of the short-term focus afflicting many politicians and members of the public, which is magnified by the desire to demonize a sector of the economy that has brought undeniable benefits to the public over many years. The price controls in Biden’s Inflation Reduction Act are a sure way to short-circuit those benefits. Those interventions effectively destroy other incentives for innovation created by legislation over several decades, as Joe Grogan describes in his piece. If you dislike pharma pricing, look to reform of patenting and the FDA approval process. Those are far better approaches.

Conclusion

Note: The image above was created by “Alexa” for this Washington Times piece from 2019.

Fiscal Foolishness a Costly Salve For Midterm Jitters

05 Friday Aug 2022

Posted by in Fiscal policy, Inflation

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The “Inflation Reduction Act” (IRA) is about as fatuous a name for pork-barrel spending and taxes as its proponents could have dreamt up! But that’s the preposterous appellation given to the reconciliation bill congressional Democrats hope to approve. Are we to believe that Congress suddenly recognizes the inflationary effects of governments deficits? Well, the trouble is the projected revenue enhancements (taxes) and cost savings are heavily backloaded. It’s mostly spending up front, which is exactly how we got to this point. There are a number of provisions intended to increase domestic energy production in the hope of easing cost-push, supply-side price pressures. However, provisions relating to fossil fuel production are dependent on green energy projects in the same locales. So, even if we get more oil, we’ll still be pissing away resources on wind and solar technologies that will never be reliable sources of power. Even worse, the tax provisions in the bill will have burdens falling heavily on wage earners, despite the Administration’s pretensions of taxing only rich corporations and their shareholders.

The Numbers

The IRA (itself an irritating acronym) would add $433 billion of new federal outlays through 2031 (*investments*, because seemingly every federal outlay is an “investment” these days). At least that’s the deal that Chuck Schumer and Joe Manchin agreed to. As the table below shows, these outlays are mostly for climate initiatives, but the figure includes almost $70 billion of extended Obamacare subsidies. There is almost $740 billion of revenue enhancements, which are weighted toward the latter half of the ten-year budget window.

The deal reduces the federal budget deficit by about $300 billion over ten years, but that takes a while… somewhat larger deficits are projected through 2026. I should note that the Congressional Budget Office has issued a new score this week that puts the savings at a much lower $102 billion. However, that “new” score does not reflect the changes demanded by Kyrsten Sinema (R-AZ).

Spending

Budget projections are usually dependent on assumptions about the duration of various measures, among many other things like economic growth. For example, the increased Obamacare subsidies are an extension, and the scoring assumes they end in 2026. It’s hard to believe they won’t be extended again when the time comes. Over ten years, that would cut the deficit reduction roughly in half.

The bill is laden with green energy subsidies intended to reduce CO2 emissions. They will accomplish little in that respect, but what the subsidies will do is enrich well-healed cronies while reducing the stability of the electric grid. Tax credits for electric vehicles will be utilized primarily by wealthier individuals, though there are tax credits for energy-efficient appliances and the like, which might benefit a broader slice of the population. And while there are a few provisions that might address supplies of fossil fuels and investment in nuclear energy, these are but a sop to Joe Manchin and misdirection against critics of Joe Biden’s disastrous energy policies.

Revenue

Should we be impressed that the Democrats have proposed a bill that raises revenue more than spending? For their part, the Democrats insist that the bill will impose no new taxes on those with taxable incomes less than $400,000. That’s unlikely, as explained below. As a matter of macroeconomic stability, with the economy teetering on the edge of recession, it’s probably not a great time to raise taxes on anyone. However, Keynesians could say the same thing about my preferred approach to deficit reduction: cutting spending! So I won’t press that point too much. However, the tax provisions in the IRA are damaging not so much because they depress demand, but because they distort economic incentives. Let’s consider the three major tax components:

1. IRS enforcement: this would provide about $80 billion in extra IRS funding over 10 years. It is expected to result in a substantial number of additional IRS tax audits (placed as high as 1.2 million). Democrats assert that it will raise an additional $400 billion, but the CBO says it’s likely to be much lower($124 billion). This will certainly ensnare a large number of taxpayers earning less than $400,000 and impose substantial compliance costs on individuals and businesses. A simplified tax code would obviate much of this wasteful activity, but our elected representatives can’t seem to find their way to that obvious solution. In any case, pardon my suspicions that this increase in funding to enforce a Byzantine tax code might be used to weaponize the IRS against parties harboring disfavored political positions. Shades of Lois Lerner!

2. Carried Interest: Oops! Apparently the Democrat leadership just bought off Kyrsten Sinema by eliminating this provision and replacing it with another awful tax…. See #3 below. The next paragraph briefly discusses what the tax change for carried interest would have entailed:

The original bill sought to end the favorable tax treatment of “carried interest”, which is earned by private equity managers but is akin to the “sweat equity” earned by anyone making a contribution to the value of an investment without actually contributing a proportionate amount of capital. I’ve written about this before here. Carried interest income is taxed at the long-term capital gains tax rate, which is usually lower than tax rates on ordinary income. This treatment is really the same as for any partnership that allocates gains to partners, but populist rhetoric has it that it is used exclusively by nasty private equity managers. Changing this treatment for private equity firms would represent gross discrimination against firms that make a valuable contribution to the market for the ownership control of business enterprises, which helps to discipline the management of resources in the private sector.

3. Tax on Corporate Stock Buy-Backs: it’s not uncommon for firms to use cash they’ve generated from operations to repurchase shares of stock issued in past. Unaccountably, Democrats regard this as a “wasteful” activity designed to unfairly enrich shareholders. However, it is a perfectly legitimate way for firms to return capital to owners. The tax would create an incentive for managers to choose less efficient alternatives for the use of excess funds. In any case, the unrestricted freedom of owners to empower managers to repurchase shares is a fundamental property right.

A tax on corporate stock buybacks can result in the triple taxation of corporate profits. Profits are taxed at the firm level, and if the firm uses after-tax profits to repurchases shares, then the profits are taxed again, and further, any gain to shareholders would be subject to capital gains tax. This is one more violation of the old principle that income should be taxed once and only once.

The proposed excise tax on buy-backs now added to the IRA is *expected* to raise more revenue than the carried interest revision would have, but adjustments to behavior have a way of stymying expectations. Research has demonstrated that firms who buy back their shares often outperform their peers. But again, there are always politicians who wish to create more frictions in capital markets because firms and investors are easy political marks, and because these politocos do not understand the key role of capital markets in allocating resources efficiently between uses and across time.

4. Corporate taxes: Imposing a minimum tax rate of 15% on corporate book income above $1 billion is a highly controversial part of the IRA. While supporters contend that the burden would fall only on wealthy shareholders, in fact the burden would be heavily distributed across lower income ranges. First, a great many working people are corporate shareholders through their individual or employer-sponsored savings plans. Second, corporate employees shoulder a large percentage of the burden of corporate taxes via reduced wages and benefits. Here’s Brad Polumbo on the incidence of the corporate tax burden:

“William C. Randolph of the Congressional Budget Office found that for every dollar raised by the corporate tax, approximately 70 cents comes out of workers’ wages. Further confirming this finding, research from the Kansas City Federal Reserve concluded that a 10% increase in corporate taxes reduces wages by 7%.”

This again demonstrates the dishonesty of claims that no one with an income below $400,000 will be taxed under the IRA. In addition, almost 50% of the revenue from this minimum tax will come from the manufacturing sector:

As Eric Boehm states at the last link, “So much for improving American manufacturers’ competitiveness!” Incidentally, it’s estimated that the bill would cause differential increases in the effective corporate tax on investments in equipment, structures, and inventories. This is not exactly a prescription for deepening the stock of capital or for insulating the American economy from supply shocks!

5. Medicare Drug Prices: A final source of deficit reduction is the de facto imposition of price controls on certain prescription drugs under Medicare Part D. A small amount of savings to the government are claimed to begin in 2023. However, the rules under which this will be administered probably won’t be established for some time, so the savings may well be exaggerated. It’s unclear when the so-called “negotiations” with drug companies will begin, but they will take place under the threat of massive fines for failing to agree to CMS’s terms. And as with any price control, it’s likely to impinge on supply — the availability of drugs to seniors, and it is questionable whether seniors will reap any savings on drugs that will remain available.

Do Words Have No Meaning?

The IRA’s vaunted anti-inflationary effects are a pipe dream. A Wharton Study found that the reduction in inflation would be minuscule:

“We estimate that the Inflation Reduction Act will produce a very small increase in inflation for the first few years, up to 0.05 percent points in 2024. We estimate a 0.25 percentage point fall in the PCE price index by the late 2020s. These point estimates, however, are not statistically different than zero, thereby indicating a very low level of confidence that the legislation will have any impact on inflation.”

Over 230 economists have weighed in on the poor prospects that the IRA will achieve what its name suggests. And let’s face it: not even the general public has any confidence that the IRA will actually reduce inflation:

Conclusion

The Inflation Reduction Act is a destructive piece of legislation and rather galling in its many pretenses. I’m all for deficit reduction, but the key to doing so is to cut the growth in spending! Reducing the government’s coerced absorption of resources relative to the size of the economy prevents “crowding out” of private, voluntary, market-tested activity. It also prevents the need for greater tax distortions that undermine economic performance.

The federal government has played host to huge pandemic relief bills over the past two years. Then we have Joe Biden’s move to forgive student debt, a benefit flowing largely to higher income individuals having accumulated debt while in graduate programs. And then, Congress passed a bill to subsidize chip manufacturers who were already investing heavily in domestic production facilities. All the while, the Biden Administration was doing everything in its power to destroy the fossil fuel industry. So now, Democrats hope to follow-up on all that with a bill stuffed with rewards for cronies in the form of renewable energy subsidies, financed largely on the backs of the same individuals who they’ve sworn they won’t tax! The dishonesty is breathtaking! This crowd is so eager to do anything before the midterm elections that they’ll shoot for the nation’s feet!

Social Insurance, Trust Fund Runoff, and Federal Debt

28 Thursday Apr 2022

Posted by in Deficits, Social Security

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The Social Security and Medicare trust funds are starting to shrink, but as they shrink something else expands in tandem, roughly dollar-for-dollar: government debt. There is a widespread misconceptions about these entitlement programs and their trust funds. Many seem to think the trust funds are like “pots of gold” that will allow the government to meet its mandatory obligations to beneficiaries. But, in fact, the government will have to borrow the exact amounts of any “assets” that are “cashed out” of the trust funds, barring other reforms or legislative solutions. So how does that work? And why did I put the words “assets” and “cashed out” in quote marks?

The Trust Funds

First, I should note that there are two Social Security trust funds: one for old age and survivorship income (OASI) and one for disability income (DI). Occasionally, for summary purposes, the accounts for these funds are combined in presentations. There are also two Medicare trust funds: one for hospitalization insurance (HI – Part A) and one for Supplementary Medical Insurance (SMI – Parts B and D). The first three of these trust funds are represented in the chart at the top of this post, which is from the Summary of the 2021 Annual Reports by the Boards of Trustees. It plots a measure of financial adequacy: the ratio of trust fund assets at the start of each year to the annual cost. The funds are all projected to be depleted, HI and OASI much sooner than DI.

Fund Accumulation

The first step in understanding the trust funds requires a clearing up of another misconception: the payroll taxes that workers “contribute” to these systems are not invested specifically for each of those workers. These programs are strictly “pay-as-you-go”, meaning that the payroll taxes (and premiums in the case of Medicare) paid this year by you and/or your employer are generally distributed directly to current beneficiaries.

Back when demographics of the American population were more favorable for these programs, with a larger number of workers relative to retirees, payroll taxes (and premiums) exceeded benefits. The excess was essentially loaned by these programs to the U.S. Treasury to cover other forms of spending. So the trust funds accumulated U.S. Treasury IOUs for many years, and the Treasury pays interest to the trust funds on that debt. On the upside, that meant the Treasury had to borrow less from the public to cover its deficits during those years. So the government spent the excess payroll tax proceeds and wrote IOUs to the trust funds.

Draining the Funds

The demographic profile of the population is no longer favorable to these entitlement programs. The number of retirees has increased so that benefit levels have grown more quickly than program revenue. Benefits now exceed the payroll taxes and premiums collected, so the trust funds must be drawn down. Current estimates are that the Social Security Trust Fund will be depleted in 2034, while the Medicare Trust Fund will last only to 2026. These dates are reflected in the chart above. It is the mechanics of these draw-downs that get to the heart of the first “pot of gold” misconception cited above.

To pay for the excess of benefits over revenue collected, the trust funds must cash-in the IOUs issued to them by the Treasury. And where does the Treasury get the cash? It will almost certainly be borrowed from the public, but the government could hike other forms of taxes or reduce other forms of spending. So, while the earlier accumulation of trust fund assets meant less federal borrowing, the divestment of those assets generally means more federal borrowing and growth in federal debt held by the public.

Given these facts, can you spot the misconception in this quote from Fiscal Tiger? It’s easy to miss:

“In the cases of Social Security, Medicare, and Medicaid, payroll taxes provide some revenue. Social Security also has trust funds that cover some of the program costs. However, when the government is short on funds for these programs after getting the revenue from taxes and trust funds, it must borrow money, which contributes to the deficit.”

This kind of statement is all too common. The fact is the government has to borrow in order to pay off the IOUs as the trust funds are drawn down, roughly dollar-for-dollar.

A second mistake in the quote above is that federal borrowing to pay excess benefits after the trust funds are fully depleted is not really assured. At that time, the Anti-deficiency Act prohibits further payments of benefits in excess of payroll taxes (and premiums), and there is no authority allowing the trust funds to borrow from the general fund of the Treasury. Either benefits must be reduced, payroll taxes increased, premiums hiked (for Medicare), or more radical reforms will be necessary, any of which would require congressional action. In the case of Social Security (combining OASI and DI), the projected growth of “excess benefits” is such that the future, cumulative shortfall represents 25% of projected benefits!

Again, the mandatory entitlement spending programs are technically insolvent. Charles Blahous discusses the implications of closing the funding gap, both in terms of payroll tax increases or benefit cuts, either of which will be extremely unpopular:

“How likely is it that lawmakers would immediately cut benefits by 25% for everyone, rich and poor, retiring next year and beyond? More likely, lawmakers would phase in reforms gradually, necessitating much larger eventual benefit changes for those affected—perhaps 30% or 40%. And if we want to spare lower-income individuals from reductions, they’d need to be still greater for everyone else.”

It should be noted that Medicaid is also a budget drain, though the cost is shared with state governments.

Discretionary vs. Mandatory Budgets

When it comes to federal budget controversies, discretionary budget proposals receive most of the focus. The federal deficit reached unprecedented levels in 2020 and 2021 as pandemic support measures led to huge increases in spending. Even this year (2022), the projected deficit exceeds the 2019 level by over $160 billion. Joe Biden would like to spend much more, of course, though the loss of proceeds from his student loan forgiveness giveaway does not even appear in the Administration’s budget proposal. Biden proposes to pay for the spending with a corporate tax hike and a minimum tax on very high earners, including an unprecedented tax on unrealized capital gains. Those measures would be disappointing in terms of revenue collection, and they are probably worse for the economy and society than bigger deficits. None of that is likely to pass Congress, but we’ll still be running huge deficits indefinitely..

In a further complication, at this point no one really believes that the federal government will ever pay off the mounting public debt. More likely is that the Federal Reserve will make further waves of monetization, buying government bonds in exchange for monetary assets. (Of course, money is also government debt.) The conviction that ever increasing debt levels are permanent is what leads to fiscal inflation, which taxes the public by devaluing the public debt, including (or especially) monetary assets. The insolvency of the trust funds is contributing to this process and its impact is growing..

Again, the budget discussions we typically hear involve discretionary components of the federal budget. Mandatory outlays like Social Security, Medicare, and Medicaid are nearly three times larger. Here is a good primer on the mandatory spending components of the federal budget (which includes interest costs). Blahous notes elsewhere that the funding shortfall in these programs will ultimately dwarf discretionary sources of budgetary imbalance. The deficit will come to be dominated by the borrowing required to fund mandatory programs, along with the burgeoning cost of interest payments on the public debt, which could reach nearly 50% of federal revenues by 2050.

Conclusion

It would be less painful to address these funding shortfalls in mandatory programs immediately than to continue to ignore them. That would enable a more gradual approach to changes in benefits, payroll taxes, and premiums. Politicians would rather not discuss it, however. Any discussion of reforms will be controversial, but it’s only going to get worse over time.

Political incentives being what they are, current workers (future claimants) are likely to bear the brunt of any benefit cuts, rather than retirees already enrolled. Payroll tax hikes are perhaps a harder sell because they are more immediate than trimming benefits for future retirees. Other reforms like self-directed Social Security contributions would create better tradeoffs by allowing investment of contributions at competitive (but more risky) returns. Medicare has premiums as an extra lever, but there are other possible reforms.

Again, the time to act is now, but don’t expect it to happen until the crisis is upon us. By then, our opportunities will have become more hemmed in, and something bad is more likely to be promulgated in the rush to save the day.