Bessent: Industry doesn't always beat govt

Alvin Bessent is a member of the Newsday editorial board.

It's an article of faith among the government-is-the-problem faithful that anything government can do, private industry can do better. The private sector does a lot of things well. But not when the issue is Medicare and the goal is to save taxpayers money.

Congress put private companies in the driver's seat on two Medicare programs in recent years. One is prescription drug coverage. The other is medical coverage paid for by Medicare but delivered through private Medicare Advantage Plans, available in permutations some find attractive, such as preferred provider organizations or HMOs.

In each case, taxpayers pay more than they would if lawmakers had just let the government do it.

The Medicare Prescription Drug program, Plan D, was launched in 2006. It's offered voluntarily to Medicare's 45 million beneficiaries and is delivered only through private insurers. About 30 million seniors have signed up. The coverage meets a real need.

But when determining the price Washington pays via the plans for various drugs, Congress cut federal officials out of the action. The law bars them from negotiating with pharmaceutical companies. So taxpayers don't benefit from the bargaining power Washington could wield based on the huge volume of drugs it buys. Instead, the private Part D plans individually negotiate prices with drug companies.

That's very different from Medicaid, the government program for the poor, where drug discounts are set by law. The Department of Health and Human Services Inspector General recently compared the results of the two approaches.

Medicaid and private, Part D insurers pay roughly the same price at pharmacies for 100 brand-name drugs. But the companies whose drugs they buy refund 45 percent of that cost to Medicaid. Medicare gets back only 19 percent. As a result the government -- i.e., taxpayers -- pays more for the same drugs if the bill is marked Medicare rather than Medicaid. Leaving the wrangling over prices to private insurers hasn't been a very good deal for taxpayers.

Neither has the compensation Congress authorized for those private Medicare Advantage plans. The program should have set the stage for a showdown between Medicare and the private insurers to see which could deliver more cost effective care. But it's not a fair fight.

Washington paid private Medicare Advantage plans 9 to 13 percent more per enrollee in 2010 than it spends to cover a person under traditional Medicare. That's about $1,100 more a year for each of 12 million beneficiaries.

Proponents said private insurers would use the additional money to provide additional coverage. Some do, for instance including drug coverage. But private, fee-for-service plans -- one type of Medicare Advantage plan -- spent less than $1 of every $4 they got above the cost of traditional Medicare on extra benefits, according to the Medicare Payment Advisory Commission.

So the extra money from Washington actually fattens the bottom lines of private insurers -- a sweet deal for an influential special interest. And whatever additional benefits they do offer nudge people to sign-up, which stacks the deck in favor of privatization.

Starting in 2012, President Barack Obama's health care reform law will gradually eliminate those extra payments. Congress, which is looking to reduce deficits, should get with the parsimony program and allow Medicare to negotiate prices with drug companies, too.

The ideological war over private versus public is a sideshow. Either approach is just the means to an end -- which should be to get the most bang for taxpayers' bucks.