Three reforms that will lower Medicare costs and improve care

Everyone wants to keep Medicare on solid financial footing. But getting agreement on how to go about it is a challenge, especially with power divided in Washington. Several drugmakers have now filed lawsuits against the Department of Health and Human Services over Medicare’s new authority to negotiate drug prices in the Inflation Reduction Act.

It’s important to find agreement on Medicare reforms, and soon. Independent analysts have sounded the alarm on the program’s future ability pay full benefits. Here are three steps policymakers can take right now to strengthen the program and ensure it can continue to provide care for Americans who depend on it.

First, roll back the drug price controls in last year’s Inflation Reduction Act (IRA). Allowing Medicare to negotiate the price of prescription drugs has been a priority for the left for years. President Biden spent a full 25 lines in February’s State of the Union bragging about the accomplishment, claiming it as a win for taxpayers and patients.

The reality is anything but. The IRA will cut drug spending by $281 billion over the next eight years, based on estimates from the Congressional Budget Office (CBO). But as my analysis for the University of Chicago shows, the law will have a chilling effect on research and development for new drugs, and the corresponding hit to innovation will lead to losses in health of at least $18 trillion.

Our research indicates the IRA will actually raise Medicare spending by stifling innovation. On average, new drug innovation cuts other forms of spending more than any added costs from new products. For example, anti-depressants cost less than psychologists, Hepatitis C drugs replace liver transplants and statins cut heart surgeries.

The lawmaker whose vote sealed passage of the IRA, West Virginia Sen. Joe Manchin (D), has already opened the door to repealing its energy components. Let’s hope others use this precedent to roll back its price control measures.

Second, the Centers for Medicare and Medicaid Services (CMS) should swiftly cover FDA-approved drugs for Alzheimer’s disease. While the agency has traditionally done so, it has taken a different tack with an emerging class of monoclonal antibody treatments, restricting coverage to patients enrolled in CMS-approved studies. In a short-sighted decision, CMS doubled-down on its commitment to restrict coverage by confirming patients will be required to enroll in a registry, even for drugs with traditional FDA approval. The announcement comes on the heels of last year’s mandate tying Medicare coverage to enrollment in qualifying clinical trials, which are often difficult to access.

Proponents of this approach argue that Medicare is in fact saving money by not covering unproven drugs. But such thinking is pennywise and pound foolish. A new analysis I conducted for the University of Chicago estimates that losses from delaying coverage of new Alzheimer’s treatments by just one year could reach $545 billion. Roughly a third of that cost would be driven by increased Medicare and Medicaid spending.

This is because Alzheimer’s is a progressive disease with equally progressive costs that grow as a patient requires more attention from the medical system and caretakers. New treatments can slow the progression of the disease in its early stages, allowing people to live independently for longer periods of time. FDA approved a treatment made by Biogen and Eisai in January that slowed the progression of disease by 27 percent over 18 months. And Eli Lilly just announced a phase 3 trial result showing its treatment did so by 35 percent over the same period. Half of patients in the trial showed no clinical progression of disease after one year. These gains imply enormous cost-reductions for Medicare if implemented quickly.

These scientific advances are bringing hope, but time is a luxury few can afford. The Alzheimer’s Association estimates that about 2,000 people transition from a mild to a moderate form of the illness each day, putting some of them out of reach to benefit from newly available treatments.

Finally, Medicare should zero out government subsidies for hospital conglomerates and consolidation. Right now, the agency pays higher reimbursement rates to medical practices that merge with hospitals. This financial arrangement incentivizes hospitals to gobble up smaller and independent practices and charge higher rates — between 106 and 217 percent more — in Medicare reimbursement.

According to the CBO, eliminating these subsidies will save more than $140 billion over the next decade. It would also be a win for patients, as premiums and cost-sharing for Medicare beneficiaries are expected to drop by $94 billion over the next 10 years, according to estimates from the nonpartisan Committee for a Responsible Federal Budget.

Hope springs eternal, but with divided government, a hyperpartisan political climate and a looming presidential race, it’s unlikely this Congress or White House will agree on major reforms to put Medicare on long-term financial footing. But that is not an excuse for complete inaction, either. Even incremental steps like the three above would help patients access the scientific advancements to help America’s seniors and Medicare’s financial well-being.

Tomas J. Philipson, an economist at the University of Chicago, was a member of the White House Council of Economic Advisers, 2017-20, and its acting chairman, 2019-20. He is now a consultant to several industries, including the biopharmaceutical industry.