PAYGO Is Killing Us

In the ongoing saga in the U.S. to try to limit drug prices, we come across this little vignette about how our obsession with good Congressional Budget Office scores is killing us (boldface mine):

Perhaps the strangest odyssey about the bill involves an amendment from Representative Pramila Jayapal (D-WA), the co-chair of the House Progressive Caucus. Jayapal’s amendment expands a section of the bill that mirrors the Grassley-Wyden legislation in the Senate. It would generate rebates to Medicare on excessively priced drugs that rise above the rate of inflation. Jayapal wanted those rebates extended to group health plans. That way everyone would benefit from the rebates, and drug companies would have incentives to keep cost increases below the rate if inflation, since they would lose any profits above that threshold.

House leadership came down on Jayapal for seeking this change. Speaker Pelosi’s staff, particularly Wendell Primus, didn’t want the amendment to pass, and this trickled down to the staffs of the Ways and Means and Energy and Commerce Committees, two of the three with jurisdiction over the bill. Jayapal got the third, the Education and Labor Committee, on board, and the amendment passed there. Even then, it had to be watered down, forcing the Secretary of Labor to conduct a feasibility study for extending the rebates to group plans, and then regulations coming subsequently on the expansion.

The leadership resisted keeping the amendment in the final bill, even after passage. The reason why is one of those around-the-bend, up-is-down consequences of a broken legislative apparatus in Washington. Pelosi’s staff has been obsessed with getting a good score on the legislation from the Congressional Budget Office (CBO). They accomplished that, with just the negotiation provisions saving the government $345 billion over a ten-year period. The more money that the bill saves, the more that can be plowed into improvements in Medicare, another priority of the bill.

However, if the rebates were extended to group plans, drug companies would have incentives to lower costs. That means less money in rebates going to Medicare, and less for Medicare to spend on other matters. So, insanely, Wendell Primus would rather keep drug costs higher outside of Medicare, so Medicare can get more rebates and use the money. The bill is called the Lower Drug Costs Now Act, but this provision, if the Jayapal amendment is removed, would incentivize higher drug costs.

“What you’ve hit on is one of the many perverse incentives in the U.S. system,” says Annette Gaudino of Treatment Action Group. “We’re robbing Peter to pay Paul to have health infrastructure in this country.”

In case you got lost trying to follow this (wouldn’t blame you as it makes no sense), Medicare gets paid the difference by drug companies between the approved Medicare price and the non-Medicare price–this is essentially a 100% tax on the difference, with the tax receipts being counted as additional assets for Medicare. For example, if group health plans were charged $200 for insulin, but Medicare only pays $100 for the same insulin, every time Medicare purchases insulin the Medicare budget receives $100 (the group health plans still have to pay $200).

However, if these rebates were expanded to programs outside of Medicare (e.g., private insurers), the private price would decline: if a drug company ends up losing that $100 of additional profit from the group health plans anyway, they’ll just lower the group health plan price to $100, so they avoid paying the Medicare ‘tax.’ This means that the ‘tax’ would generate less revenue and Medicare’s budget would shrink, the result being that other Medicare services would have to be cut (unless, of course, Congress were willing to tell its own budget office not to count this against the spending cap, which the PAYGO Austerians will never do).

If you still don’t get it, don’t feel bad: this is nonsensical.

Austerioeroticism in the form of CBO scores is killing us.

Also, best healthcare system in the world something something.

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2 Responses to PAYGO Is Killing Us

  1. adameran says:

    The foundation of “PayGo” is the “tax & spend” meme. It’s essentially the belief that money grows on billionaires. But back here, in reality, people must get the dollars before they can pay them in taxes. So government–the monopoly provider of dollars–must spend them out into the economy first. Reality says “spend first, then retrieve some dollars in taxes.” The spending is, of necessity, unconstrained by tax revenue. Taxes make the dollars valuable, but they do not provision the government.

    What do we call the dollars left in the economy, un-retrieved by taxes? Answer #1: The dollar financial assets of the population (their savings). Answer #2: National ‘debt’… Both answers refer to exactly the same thing, just as your bank account is your asset, but the bank’s liability.

    This is not exotic economics (although Modern Money Theory is congruent with this observation), it’s double-entry bookkeeping.

  2. What are they expecting to get for achieving a good CBO score, a gold star? I’ll bet the GOP doesn’t give a shit about the CBO.

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