A Hidden Tax-Hike on Seniors

May 16, 2013

Last summer, Americans for Prosperity analyzed the disappointing Medicare reforms in the President’s signature health care law. In February, the President suggested additional so-called reforms to Medicare in his State of the Union speech. Just like his reforms in 2010, these proposals fail to address the underlying issues in Medicare.

One reform in particular, Medicare D drug rebates, cloaks a tax hike for seniors in the rhetoric of class welfare.

Medicare Part D was created in 2006 to allow seniors to purchase prescription drug coverage to support traditional Medicare coverage. The program harnesses the power of the free market by allowing insurance companies to compete for business. Seniors have numerous options for purchasing their coverage, and the program has been wildly successful. Almost 90% of seniors are satisfied with the program and costs are 40% below original estimates—an incredible feat for any government entitlement program.

Insurance companies negotiate prices with all providers within its system, including drug companies. Insurers want to ensure the best quality drugs at the lowest possible prices, driving down the total cost of insurance. The drug manufacturers try to negotiate for the best price for their end. As with all voluntary trades, a mutually beneficial, consumer-focused outcome is achieved.

The President is out to disrupt this delicate balance. He claims these negotiations results in a “subsidy” to drug makers; they are making too much money at taxpayer’s expense. That’s only because the insurance companies don’t force drug makers to sell their products at a loss as the government does in Medicare’s poorly-run sister, Medicaid.

Under the President’s Medicare proposal, drug companies would need to rebate up to 23% of their drug sales back to Medicare as determined by health care bureaucrats.

This isn’t a “rebate” at all; it’s a tax on drug companies.

Obviously, this would have dramatic impacts on the market. Drug companies would respond by embedding the cost of tax in the price of their drugs, driving up the end cost of insurance for seniors. Increasing the price of insurance—due to direct government involvement—functions exactly as a tax increase for seniors. A recent study by the American Action Forum estimates that these drug rebates would increase the price of Part D premiums up to 40%.

Unfortunately the President’s prescription rebate proposal has been introduced as legislation (S. 740, H.R.1588), sponsored by Senator Jay Rockefellar of West Virginia, one of the key creators of ObamaCare, and Representative Henry Waxman of California.  AFP issued a letter of opposition urging the House and Senate to vote against the deceptively named “Medicare Drug Savings Act of 2013” noting that it will increase costs, not decrease them.  Again and again, President Obama supports Medicare reform plans to consolidate power in the hands of bureaucrats removing choice and competition.

This latest proposal embodies the President’s preferred outcome with dastardly results for seniors—a 40% increase in the price of insurance.

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