THE GOVERNMENT, thanks to Medicare and Medicaid, is by far the nation's largest purchaser of health care. To protect itself from rising costs, in recent years it has moved without ever quite saying so toward a form of price controls. Medicare payments to hospitals used to be based on the hospitals' costs. Since 1983 they have been based instead on what amounts to a federal fee schedule. A similar schedule will soon be published for doctors under legislation passed last year. Now Congress has also turned to a third major source of costs: prescription drugs. The deficit-reduction plan it passed exacts rebates from pharmaceutical companies for drugs purchased under Medicaid.
The new limits on what government will pay will save the federal government an estimated $1.9 billion during the next five years and state governments, which share the cost of Medicaid, about $1.5 billion. The savings will finance the expansion of the program for which Congress also voted. In stages during the next 13 years all poor children in the country will be covered under Medicare; only about half are covered now. The basis for the new system will be current drug prices, indexed annually for inflation. For drugs prescribed through Medicaid, the manufacturers will ultimately be allowed to charge only 85 percent of these amounts unless they give some other purchaser a deeper discount, which they would have to give the state and federal Medicaid agencies too. Medicaid drugs are often bought at retail; settlement will therefore be through rebates from manufacturers based on sales at the end of each year.
The manufacturers lobbied hard against the controls. Among other things, they fear that what happened to hospitals may happen to them: other customers will demand the same price breaks as the government. They say as well that the new controls will be disruptive, have uneven effects within the industry and reduce the funds left over for research. But hospitals made similar complaints and have survived, and here some hard-pressed states had already begun to limit prescription drug expenditures in ways that neither the industry nor patient advocacy groups much liked. These were lists of certain drugs the states either would or would not buy; the objection from the patient standpoint was that they created a dual system of medicine. The federal bill largely avoids them.
About an eighth of drug industry sales are now through Medicaid. The industry cannot expect so large a customer to give it a blank check. Health care now consumes more than a tenth of all the money that Americans spend and about a seventh of the federal budget. These shares are rising, and neither patients nor providers can expect them to continue to rise uncontrolled.