The president is demanding that seniors fund his American Jobs Act

Douglas Holtz-Eakin Former Director, CBO
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The first rule of horror movies is that the villain is nearly impossible to kill. It would appear the same is true in public policy, where the worst proposals are dismissed — only to rise again like zombies.

The latest example of this is the American Jobs Act proposed by President Obama. While the president tours the country promoting his latest jobs proposal, he is largely quiet on how the bill would breathe new life into a bad proposal, a proposal that would weaken one of the strongest programs in our nation’s entitlement system and leave American seniors to foot the bill.

It is no secret that America’s entitlement programs are broken. These crucial elements of the safety net for our seniors and low-income Americans are bleeding red ink and will not survive to the next generation. It is imperative that we undertake real reforms that secure the safety net for the future, stem the flow of red ink, and deliver on the promise of American greatness.

But in the midst of this entitlement tumult, there has been an island of promise. The Medicare prescription drug program has been our country’s most successful entitlement program because it forces drug plans to compete for seniors’ valuable dollars. Since its creation, the program has come in over 40 percent below its estimated cost and delivered a wide array of choices tailored to seniors’ circumstances. Now President Obama wants to destroy this success story to “pay” for his second attempt at economic stimulus, the American Jobs Act.

During the debt ceiling negotiations, the administration and Democratic congressional leaders sought a drug “rebate” program that would turn Medicare Part D into a Medicaid-style program. Specifically, the proposal would require drug manufacturers to pay Medicaid-style rebates for the opportunity to sell prescription drugs to seniors enrolled in Part D.

With the super committee talks underway, the administration has renewed its effort to force Medicaid-style rebates into the Medicare Part D program. This week, President Obama visited St. Louis and Dallas claiming that his $447 billion jobs bill is paid for through painless taxes on the rich.

This campaign is misleading. The president’s proposal to the super committee shows that upwards of $120 billion of that funding would come from Medicaid-style rebates in Medicare Part D — sticking most seniors with significantly higher drug bills.

Michael Ramlet and I conducted a recent analysis that shows imposing Medicare Part D prescription drug rebates would increase monthly premiums by up to about 40 percent for more than 17 million seniors. This analysis concluded that the administration’s Part D rebate plan would have a far-reaching impact, hurting the successful and popular Medicare prescription drug program.

How much damage could Medicare drug rebates do? We estimate Medicare Part D rebates would increase total premium costs for seniors nationwide by up to $3.7 billion per year.

Of equal concern is that the Medicaid rebate program has a track record of increasing the cost of prescription drugs in the private-sector markets. A Medicare rebate would have the same effect of increasing prescription drug costs in private-sector markets, only the impact would be more significant, due to Medicare being a much larger program.

Over time, rebates will further diminish pharmaceutical innovation. Rebates can’t come out of nowhere, so drug companies will also have to scale back research and development. Changing market forces from this proposal could trigger other market responses, such as changes in prescription drug plan availability. The rebates could also reduce the incentive for health plans to enroll low-income beneficiaries.

Medicare Part D has been a dramatic success. Part D created a truly competitive market for the first-time in the Medicare program’s history and the results speak for themselves. Last month it was reported that the average price of a Part D drug plan would decline next year. In this day and age, it is unheard of for health care costs to decline.

The government needs to interfere less with Medicare Part D, not become more involved, as President Obama has proposed as part of his jobs bill. The question policymakers should ask is how we make other entitlement programs more like Medicare Part D, not the reverse.

Douglas Holtz-Eakin is president of the American Action Forum. He was the director of economic policy for John McCain’s 2008 presidential campaign.