Washington's Rebate Tax Would Be Paid By Seniors (Guest Column)

Jul 27, 2011

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Leading congressional Democrats appear ready to impose a new tax on prescription drugs for seniors -- a tax that would increase Medicare drug plan premiums for some seniors by as much as 40 percent.

Those lawmakers wouldn't describe their plan that way, of course, but that would be the effect of their proposal to require drug companies to pay Medicaid-style rebates to Medicare.

Pharmaceutical companies already are required to pay rebates to states for the right to sell their products to Medicaid patients. A proposal by Rep. Henry Waxman, D-Calif., and Sen. Jay Rockefeller, D-W.V., would require drug companies to pay a rebate to the federal government for prescription drugs sold through Medicare Part D for those low-income seniors who also qualify for Medicaid or who are eligible for subsidies. This proposal, which is now in play as part of the negotiations to increase the government’s debt ceiling, would collect up to $112 billion over the next 10 years.

Supporters of the rebate proposal say the money would come from the pharmaceutical companies, but the logic is flawed. Experience with the Medicaid rebate programs already has been shown to increase costs for prescription drugs sold in the private sector. And ultimately, the rebate costs are shifted to consumers.

If the new Medicare rebate tax were imposed, more than 17 million seniors who don't qualify for low-income subsidies would face drug benefit premiums that would be 20 to 40 percent higher than they are paying now, and they would face an average of $200 a year in higher out-of-pocket costs.

These are the findings of a study conducted by Douglas Holtz-Eakin, former director of the Congressional Budget Office who is now president of the American Action Forum, and his associate, Michael Ramlet, the forum's director of healthcare policy.

Holtz-Eakin and Ramlet studied government data to determine the impact that the rebate plan would have on prescription drug costs. While lower income seniors are protected by government subsidies from paying higher premium costs, they find that millions of other seniors would be forced to pay higher premiums for their drug coverage as a result of the rebate tax.

"This proposal would be a bad deal for Medicare and a raw deal for millions of seniors," Holtz-Eakin said. "This is a price-fixing scheme that will take money out of the pockets of senior citizens and greatly reduce customer choice."

The proposed rebate tax also would undermine the most successful health program the government operates -- the Medicare prescription drug program.

The prescription drug program, which began in 2006, requires private companies to compete on benefit design and price in offering drug coverage to seniors.

The program is popular because it gives seniors a wide range of choices of prescription drug plans, with different cost points and drug offerings. And it is has the remarkable distinction of costing taxpayers much less than expected. The Medicare Part D program is coming in at 46 percent below projected costs, according to the CBO.

And Part D's competitive model is saving seniors money as well. The average monthly beneficiary premium for Part D coverage will be $30 in 2011, far below the $53 forecast originally.

But the proposed rebate tax, which also has been endorsed by President Barack Obama, would undermine the gains that competition and consumer choice have brought to the Part D drug benefit program by forcing higher costs on seniors.

"The Medicare prescription drug benefit is one of the only bright spots on the entitlement landscape, costing less than projected and delivering real value for seniors. The last thing the president and Congress should do is turn it into a Medicaid-style program," Ramlet said.

The rebate plan is not a way to cut government spending but is simply a ploy to shift higher costs to seniors. Congress should look elsewhere for real savings rather than resorting to gimmicks that will trick seniors into paying the bill.

Grace-Marie Turner is president of the Galen Institute, a non-profit research organization that focuses on market-based health policy solutions. She is a co-author of Why ObamaCare Is Wrong for America (Broadside/HarperColllins, 2011).