As no less a public figure than Sen. Bernie Sanders (I‑Vt.) has ironically been discovering lately, it’s not easy for an employer to comply with wage and hour law these days. For another illustration as to why that is, consider last month’s unanimous Supreme Court ruling reversing the Ninth Circuit in Parker Drilling v. Newton. 

Although it was closely followed by business groups, Parker Drilling drew relatively little attention in the wider press. The practical question it raised might at first seem irrelevant to most ordinary workplace settings, namely: are oil workers on platforms off the California coast owed overtime pay for time they spend sleeping and otherwise off duty while on site? 

Up till 2015, the answer to that question seemed clear: federal law sets labor standards for offshore platform workers, and it says sleep and recreation periods don’t have to be paid. (Such arrangements have long been routine at the platforms, given that for many workers commuting to housing on land is not very practical.) In 2015, however, the California Supreme Court interpreted its state law in a different and more liberal way, classifying more on-site sleep and recreation arrangements as generating legally compensable time. Class action lawyers sprang into action, arguing that this new state rule should be applied to platform workers off the Pacific coast. While a district court dismissed the claim, the Ninth Circuit vacated and remanded, holding that the federal labor rules incorporated the new California rules by implication. 

Pause for a moment to note a curious thing about this controversy: at least for the sorts of high-skill jobs found on offshore oil platforms, predictable labor market adjustments could mean that a legal rule on whether to count sleep time might not make much difference in practice. As the Washington Legal Foundation noted in its merits brief before the high court, “Until California announced its rules four years ago in Mendiola v. CPS Security Solutions, Inc., employers and employees negotiated OCS [Outer Continental Shelf] wage agreements with the understanding that sleep and rest time spent on OCS structures was not compensable under applicable federal law.” Flip that presumption, and with base wage lowered appropriately (still higher than minimum wage) and overtime added back, the negotiation could wind up reaching much the same overall pay package.

What proved distinctively destructive, here as in many situations, was legal uncertainty. As often happens when law changes by judicial say-so, the new California rule was said to apply retroactively: the platforms should have been paying for downtime all along. So the platform employers were handed an enormous past bill for compensation that, had they known ahead of time, they might have negotiated their way around. 

Now that won’t happen: after its own dive into the waters of statutory language and federal pre-emption theory, the Justices unanimously agreed that federal law does not incorporate California’s for this purpose, putting yet another distinctive Ninth Circuit frolic to an end. But the drilling episode typifies many other situations in which wage-hour law, especially as it comes under pressure to change and liberalize, generates uncertainty. Should exemptions be read narrowly so as to bring more white-collar and academic workers under overtime law? Is time spent donning and doffing work apparel compensable? What about the situations of tipped restaurant workers, service advisers at car dealerships, church volunteers, gig economy drivers, and workers who check e‑mail after work hours? 

Even if you’re a class action lawyer, it’s hard to see all these uncertainties as optimal. 

Before the distraction of Robert Mueller’s congressional testimony and its inconsequence, the nation had been roiling over President Trump’s tweet that four progressive, minority congresswomen should “go back” to the countries “they originally came from.” The president’s critics condemned the tweet as racist and xenophobic. He and his supporters responded that it was a justified demand that Reps. Alexandria Ocasio-Cortez (D, NY), Ilhan Omar (D, MN), Ayanna Pressley (D, MA), and Rashida Tlaib (D, MI) stop criticizing the nation and its government’s policies.

This post focuses on a different problem with the tweet, one that has gotten overlooked: it was a direct attack on representative government and the U.S. Constitution. And the attack has been repeated in Trump and his supporters’ subsequent comments.

In their 2018 election campaigns, Ocasio-Cortez, Omar, Pressley, and Tlaib were explicit about what messages and ideas they would take to Washington. Agree with them or not, the legislators are now in Congress doing what their constituents elected them to do. Because the four are following their voters’ will, Trump and his supporters say the congresswomen should leave the Capitol and/​or the country.

Trump and his supporters may consider this a patriotic defense of the United States. But the demand to “Send them back!”—even if just campaign rhetoric—strikes at the nation’s founding principles. It is as much a violation of America’s ideals as celebrating the country’s independence with a display of military might rather than a tribute to individual liberty and democratic representative government.

With clear evidence that restricting the number of prescriptions increased the death rate by driving non-medical users to heroin and fentanyl, the last thing one wants to hear about is a politician planning to double down on this deadly policy by calling for further prescription limits for patients in pain.

Yet Senator Robert Portman (R‑OH) is proposing legislation that would impose a national 3‑day limit on opioid prescriptions following surgeries. He will be kind enough to allow exceptions for people dealing with cancer, chronic pain, and “other serious matters”—whatever that means.

Government data show there is no correlation between the number of opioids prescribed and their non-medical use or the development of opioid use disorder. Overdose rates skyrocketed during the last 10 years while high-dose opioid prescriptions dropped more than 58 percent and total volume of dispensed opioids dropped more than 29 percent. Seventy-five percent of opioid-related deaths in 2017 involved fentanyl and heroin, and fewer than 10 percent involved prescription pain pills without also involving heroin, fentanyl, cocaine, tranquilizers, or alcohol. 

The senator has determined that, “After the second or third [postoperative] day, other pain medications work just as effective (sic).” In my more than 35 years as a practicing general surgeon, I usually find that my patients recovering from major surgery require prescription opioids to control their pain for more than 2 or 3 days. It is bad enough that many states have imposed 5 or 7 day limits on opioid prescriptions, forcing many patients in severe pain to make multiple trips to the doctors office for refills. Imposing a national 3‑day limit lacks an understanding of the science. It would be an unfounded and callous government intrusion into the practice of medicine.

Senator Portman, like so many other politicians untrained in medicine or pharmacology, is guilty of misinterpreting and misapplying the guidelines on opioid prescribing published in 2016 by the Centers for Disease Control and Prevention. He must still believe that today’s non-medical users are yesterday’s pain patients, even though, as mentioned above, there is no evidence of any correlation between the two. 

He also seems to think there is a high risk of addiction in patients prescribed opioids for acute post-surgical pain. Yet a well-publicized study in the medical journal BMJ by researchers at Harvard and Johns Hopkins looked at 568,000 opioid “naïve” patients in the Aetna health insurance data base given prescription opioids for acute postoperative pain over the period of 2008–2016. The researchers found the “total misuse rate,” i.e., rate of all opioid misuse diagnoses among the 568,000 patients prescribed the opioids, was 0.6 percent.

Senator Portman told Ohio reporters, “After day four, five or six, the chances of becoming addicted are higher.” Maybe he is reacting to the statement by the researchers in the BMJ report that each refill and additional week of opioid use was “associated with an adjusted increase in the rate of misuse of 44%.” But a deeper look at their data shows the incidence of opioid misuse rose from 145 cases per 100,000 person years, or 0.15 percent per year, in patients who had no refills, to 293 cases per 100,000 person years, or 0.29 percent per year, for persons who had one refill. Indeed, that is nearly double. But if you nearly double a very low number, you still get a low number.

The fact is the overdose rate from the non-medical use of licit and illicit drugs has been on a steady exponential increase since the 1970s and shows no signs of slowing down. The only thing that has changed over the years is the particular drug in popular use at any given time. The reasons behind this are complex and multifactorial, and likely sociocultural and psychosocial. In the early part of this century the popular drugs for non-medical users were diverted prescription opioids. Next it became heroin. For the past several years it has been heroin and fentanyl. Methamphetamine related deaths are now surging to all-time high levels, and preliminary estimates from the CDC place the number of meth-related deaths at nearly 13,000 in 2018—eclipsing the number for prescription opioid-involved deaths.

Senator Portman is two or three drugs behind in his prosecution of the drug war. 

To bring the death rate down, Senator Portman should learn a lesson from his home state of Ohio, where a recent embrace of harm reduction measures—expanding needle exchange programs, distributing the overdose antidote naloxone, and increasing access to Medication Assisted Treatment—has led to a 23.3 percent drop in overdose deaths in 2018 according preliminary CDC data. Harm reduction is a proven strategy for saving lives.

If Senator Portman wishes to craft legislation that can truly save lives, he should propose a repeal of the federal “Crack House Statute.” This law stands in the way of many of the country’s largest cities that wish to establish Safe Injection Facilities, which are preventing overdoses and saving lives in more than 120 cities throughout Europe, Canada, and Australia.

Every presidential candidate promises to “reduce income inequality” by raising tax rates on the rich and increasing transfer payments (including tax credits and in-kind benefits) for the middle class. Yet the widely-used flawed data from Thomas Piketty and Emmanuel Saez exclude both taxes and transfers. Income measures that exclude taxes and transfers cannot tell us whether taxes or transfers are high or low, and cannot be directly affected by higher taxes on some or higher transfers to others (because such policies are ignored in the data).

A simple table adapted from the 2017 Consumer Expenditure Survey, from the Bureau of Labor Statistics, may be sufficient to show how crucial it is to take account of taxes (including refundable tax credits), and also to adjust average income for the different number of people and workers per household.

Incomes are shown by fifths (“quintiles”), with the lowest 20% on the left and highest on the right.

The second row shows the “lower limit” of pretax income needed to counted be in each quintile. The next two rows show mean (average) income before and after taxes. 

The column at the far right shows a ratio of highest to lowest income, called the 80/20 ratio, which a common gauge of inequality. It shows that the highest 20% earned 16.5 times as much as the lowest 20% before taxes, but only 12.5 times as much after taxes. 

But simply adjusting household income for taxes is not enough. Average incomes cannot be properly compared between the highest and lowest quintiles because there are three times as many people per consumer unit (household) in the highest 20% as there are in the lowest. And there are four times as many workers in the highest 20% as there are in the lowest.

By adjusting for different household size, we find the highest 20% earned only 6.5 times as much after-tax income per person as the lowest 20%. 

But income is likely to be higher in households with two or more workers than it is in households with no workers or only one. So, that last row measures average after-tax income per worker in the highest and lowest quintiles (and those in between).

By further adjusting for the different number of earners, the highest 20% earned only 3 times per worker as much as the lowest 20%, after taxes. 

Properly understood, the facts about U.S. after-tax income distribution and growth are insufficiently alarming to justify the political misuse of questionable pretax, pretransfer income statistics as a false argument for redistributing after-tax income.

Senator Josh Hawley (R‑MO) thinks America has an identity problem. Or, more accurately, that the nation suffers from a lack of an identity problem. In a speech last week at the National Conservatism Conference, he blamed the nation’s ills on an elite “political consensus [that] shows little interest in our shared way of life.” He excoriates cosmopolitans who, he says, reject the idea of Americanness in favor of being “citizens of the world.” According to Hawley, progressives, classical liberals, and libertarians “distrust patriotism and dislike the common culture left to us by our forebearers.” For the nation to prosper, it needs to re-embrace shared identity, which for Hawley means small towns, “traditional” values, recognizing the centrality of Christian faith to the American project, and returning to an economy built on manufacturing “the kinds of things a normal person without a fancy degree can build with his hands.”

I fear the senator from Missouri is confused about identity, and his confusion has led him to see a lack where there is instead mere difference. America is not operating without an identity or a shared way of life. Rather, America simply stands for something other than what Hawley and his fellow nationalist, populist conservatives wish it would. We have a shared way of life. It’s just one Hawley doesn’t much like. And where conservatives of his sort blame this shift on oppression and suppression–by Big Tech or Big Media or elites controlling governing institutions–the more likely story, or at least the greater portion of it, is that his preferred values and tastes have lost in America’s liberal and tolerant marketplace. When given the opportunity to vote with their feet and their wallets, the majority of Americans don’t much care for Hawley’s halcyon days.

When Hawley gripes that “the cosmopolitan elite look down on the common affections that once bound this nation together: things like place and national feeling and religious faith,” we can clearly see his mistake. The culture of pluralism, openness, globalism, and, yes, cosmopolitanism, isn’t about rejecting the idea of America or of America as a place. Rather it’s about recognizing that America is great because of our pluralism and openness and our capacity to welcome any and all who want to partake in this grand and ongoing experiment in liberty. That’s what sets this country apart from so many others. Our identity isn’t about soil or ethnicity, as it largely is in Europe. Rather, it’s about the idea of America, and so anyone can become an American just by coming here and embracing that idea. 

That American idea, that “national feeling,” is widely shared, but it happens to be one of openness and pluralism and an enthusiastic embrace of diverse ways of life. That’s why Trump lost the popular vote, why he remains historically unpopular, and why his party last year suffered the worst congressional electoral shellacking since Watergate. It’s why 64% of Americans want to see immigration levels increased or at least kept the same, while only 35% would like to keep more people out. And America is still a deeply religious place. But it’s one that recognizes and celebrates people of all faiths, even those traditionally sneered at or feared by so many of the people Hawley sees as embodiments of America’s true values.

That’s the America we celebrate and the one we feel patriotism for. America has a strong identity and a common culture, evidenced in the polls and ballot box, in revealed preference and behavior, in protests at ICE detention centers and the majorities who view the president’s rhetoric as conflicting with American values. Maybe Senator Hawley can some day better understand this great nation and come to appreciate what makes it great.

Regular Alt‑M readers are no doubt looking forward to the FOMC’s announcement next Wednesday. But I doubt they’ll be sitting at the edges of their seats between now and then, much less biting their fingernails.

Markets have, after all, been anticipating a modest Fed cut ever since the committee’s last meeting, when the FOMC chose not to cut just yet, but to “wait and see.” During his recent appearances before the House and Senate, Chair Powell only seemed to reinforce the general belief that “wait and see” meant “we’ll cut in July.” Finally, since the relatively dovish Jim Bullard, the lone dissenter in June, who favored a rate cut then, still thinks that a 25 basis point cut should suffice, it hardly seems likely that the Fed will cut its target by more than that amount. In short, it’s no surprise that futures traders now see a quarter-point cut as all but certain.

But it doesn’t follow that next week’s FOMC decision will be altogether free of suspense. On the contrary: there’s still a big question-mark hanging over it. The question isn’t whether the Fed will lower its rate target, and by how much. It’s whether market rates will respond in kind.

IOER: From Leaky to Lacking Gravity

Under normal circumstances, short-term market rates follow, or even anticipate, Fed rate changes as a matter of course. Certainly that was so before the Fed started paying interest on banks’ excess reserve balances (IOER) in October 2008, thereby switching from its former, asymmetric “corridor-type” operating framework to its current “floor” framework. And, allowing for the “leakiness” of the Fed’s IOER floor, which caused the effective fed funds rate and some other money-market rates to post below the IOER rate, that pattern continued to hold until several years ago.

But, as I explained in a previous post, in recent years market rates have stopped moving in step with the Fed’s IOER rate settings. Instead, with every rate change since 2015, the gap between the IOER rate and short-term market rates has also changed. Between 2015 and 2019 what had been a positive gap gradually disappeared; and since early 2019 (as the chart below shows) the gap has turned negative.

Although various reasons have been offered for this change, the most straightforward one attributes it to the Fed’s balance-sheet unwind. That unwind, which began in October 2017 and is scheduled to end sometime after this September, is said to have reduced banks’ excess reserve holdings (the chart’s purple line and right scale) enough to make it necessary once again for some banks to borrow fed funds to avoid reserve shortages. That this should be happening with some $1.3 trillion of excess reserves still at banks’ disposal may seem implausible. But between them, Basel’s LCR requirements, Fed supervisors’ reported (but officially unacknowledged) insistence that banks meet part of those requirements using excess reserves, and the very uneven distribution of outstanding excess reserves among banks, seem capable of accounting for occasional reserve shortages.

So far, the Fed has responded to the tendency of market rates to rise relative to the IOER rate by putting space between the upper limit of its fed funds rate “target range” and its IOER rate. While these were once identical, three “technical adjustments” have now put a 15 basis-point gap between them. The Fed has thus been able to avoid missing its (increasingly wide) target. But that purely cosmetic victory shouldn’t deceive anyone: the plain truth is that it’s the proximity of market rates to the IOER rate that matters: changes in the IOER rate are supposed to lead to sympathetic changes in other market rates, and thence to changes in the extent of lending and investment. If market rates don’t keep step with the IOER rate, monetary policy isn’t working properly. And if they don’t budge when the IOER rate changes, monetary policy isn’t working at all.

Stuck in Neutral?

And to judge by the last IOER rate change, monetary policy may not be working at all. As the chart below shows, that last 5‑point IOER rate cut (the slight drop in the red line toward the right-side of the chart) took place at the end of April. Because the cut was made without changing the Fed’s target settings, it was billed, not as an official rate cut, but as the latest of the Fed’s “technical adjustments.” Nevertheless, from a strictly economic perspective, it was a rate cut in every sense that matters, because, as I noted a moment ago, changes in the Fed’s upper- and lower- target range settings are merely cosmetic, whereas changes in the IOER rate are supposed to do the actual, heavy lifting of influencing other market rates. (A second administered Fed rate — offered by its Overnight Reverse Repurchase facility— both defines the lower limit of its rate target range and limits the extent to which the fed funds rate can fall below the IOER rate. But that facility has seen very little activity since overnight market rates rose to, and then beyond, the IOER rate.)

So, just how much heavy lifting did April’s IOER rate cut do? The answer, as the chart shows, is: next to none. Although the effective fed funds rate (green line) did decline for a while, it only touched down on the lowered IOER rate twice, and briefly. As of mid-July it was back at 2.4 percent, that is, precisely five points above the new IOER rate, where it had been for most of the period preceding the April change. In short, to judge by the effective fed funds rate, the April IOER cut ended up doing precisely nothing.

Yet bad as that sounds, it understates things. Since the Fed introduced its floor system, the federal funds market has been notoriously thin, making the effective fed funds rate an unreliable proxy for the general level of short-term market rates, and of overnight market rates especially. A better proxy, available since mid-2018, is the New York Fed’s “Secured Overnight Financing Rate” or SOFR, “a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.” As the chart shows, the SOFR (blue line) also declined for a time after the April IOER cut; but recently, at 2.46 percent, it’s higher than it was at the time of the cut; and at one point is was just shy of 2.6 percent! I suppose that some people can look at this record yet remain convinced that a rate cut next week is bound to be fully effective. But I’m not one of them.

Fixing A Broken Fed

Instead, I’m an incurable pessimist. Consequently I will be sitting at the edge of my seat, and biting my nails, not before but for some days after the FOMC’s announcement, with my eyes glued to the SOFR and other overnight rates, to see whether they fall below their almost constant average levels so far this year, and do so by the amount of the Fed’s cut. If they don’t, the good news is that we can all stop worrying about the Fed’s future rate decisions. The bad news is that we’ll have to start worrying about how to fix an apparently broken Fed.

How to do that? There are two obvious options. But one of them isn’t tweaking the Fed’s target range settings yet again. To repeat (for it seems to bear repeating), those rate limit settings are cosmetic only, like so much lipstick; and pretending to fix a broken Fed’s rate-control system by messing with them is like putting lipstick on a pig. The Fed may claim that the lipstick is helping it to hit its rate target. But it cannot claim that it’s actions are moving market rates as they’re supposed to.

The first option is for the Fed to suspend its balance-sheet unwind at once, instead of waiting until October, and if needed to reverse course by resorting to enough Quantitative Easing to keep overnight rates no higher than the IOER rate. The second is to establish a Standing Repo Facility (SRF) like the one proposed in March by Jane Ihrig and David Andolfatto. By standing ready to trade reserves for banks’ holdings of Treasury securities at a rate set only slightly higher than the IOER rate, the SRF would put a ceiling on overnight market rates, keeping them close to the IOER rate, much as the Fed’s ON-RRP facility once limited the extent to which those rates could fall below the IOER rate. In the limit, as the distance between the STP and ON-RRP rates approached zero, the Fed would exercise perfect control over overnight repo rates by entirely displacing the private overnight repo market! According to recent reports, informed by the FOMC’s June proceedings, the Fed is now leaning toward the SRF solution.

If the Fed does go the SRF route, it needn’t stop shrinking its balance sheet. On the contrary: the Fed may find it desirable to unwind more aggressively: knowing that they can trade government securities for reserves in a pinch, and provided regulators let them, banks that now have plenty of excess reserves will be inclined to swap them for higher-yielding Treasurys. Reserves will then become less scarce, while Treasurys will be in relatively high demand. By selling more Treasurys to meet that demand, the Fed can help prop-up the far end of a troublesomely inverted yield curve.

The Corridor Option

Fed officials might be happy not to go even that far, sticking instead with their current plan to cease unwinding sometime soon after September. Personally I think they ought to go further, taking advantage of the new SRF to switch from the present floor system to an orthodox corridor system. In a corridor system a single Fed “deposit rate” would be offered to all institutions that keep balances with the Fed, directly or by means of an reverse repo facility. That rate would define the lower limit of the corridor, while the proposed SRF, or something like it, would define the upper limit. Reserves would be kept scarce enough to keep the effective fed funds rate between, and ideally half-way between, the corridor limits. Just how low the quantity of excess reserves would have to go to achieve this outcome, given present regulations (but taking the presence of an SRF into account) is hard to say; but it’s likely to be less, and perhaps much less, than half their present amount.

Why prefer a corridor? First, the smaller Fed balance sheet it entails means a correspondingly reduced Fed “footprint” on the U.S. credit market: the Fed could once again claim, as it did not long before the Great Financial Crisis, to “Structure its portfolio and undertake its activities so as to minimize their effect on relative asset values and credit allocation within the private sector.” By doing so the Fed would leave the task of credit allocation, and the risks it entails, as completely to private-sector intermediaries as possible. Doing that makes sense, surely, as efficient credit allocation is neither part of the Fed’s mandate nor something that it’s able to engage in, given the (quite proper) restrictions on assets it’s allowed to acquire. As Charles Plosser has eloquently argued, a small Fed balance sheet would also limit “the opportunity and incentive for political actors to exploit the Fed’s balance sheet to conduct off-budget fiscal policy and credit allocation.”

Switching to a corridor system would also serve to revive the presently moribund fed funds market, by once again confronting banks with occasional reserve shortages. By so doing it will supply a powerful incentive both for the building of durable interbank credit relations based on routine bank cross monitoring — monitoring that keeps banks alert to other banks’ condition. Such interbank credit relations and monitoring can play an important role in limiting systemic risk, by reducing sound banks’ exposure to panic-based runs while enhancing their access to last-minute private-market funding, ultimately limiting the need for Fed bailouts.

[Cross-posted from Alt‑M.org]

The Medicare program is a bonanza of centralized economic planning, special-interest lobbying, pricing errors, perverse incentives, low-quality care, improper payments, and fraud. To paraphrase Lenny Bruce, Medicare is so corrupt, it’s thrilling. It is so corrupt, we at the Cato Institute just published a whole book — Overcharged — about how corrupt it is.* That book has a section called, “Medicare Part D: The Always-Pouring Pitcher of Drug Fraud.” Overcharged recounts how “the passage of Part D is associated with a large increase in the average launch price of oncology products.” It quotes Senate Finance Committee chairman Charles Grassley (R‑IA) as saying, “It may be that some drug companies are taking advantage of government programs to maximize their market share.” (Gee, ya think?)

Today, the Senate Finance Committee will consider legislation that attempts to fix some of those problems by changing the way Medicare pays for certain prescription drugs. The specifics of the proposed changes are mind-numbingly complex. They have been known to cause health care wonks to scratch their heads and non-health care wonks to flee the room. If you want to read about the particulars in all their wonky glory, click here.

The most significant changes regard Medicare Part D. Many of these changes would be beneficial. Two of them — a redesign of Part D “standard coverage” and a cap on subsidies to drug manufacturers — would save taxpayers a projected $85 billion over 10 years. Predictably, the people to whom that taxpayer money would otherwise flow are trying to block those savings. (See “special-interest lobbying,” above.)

We begin with some background on Medicare Part D.

Background on Part D

In Part D, willing enrollees pay premiums to private health insurance companies to manage their drug coverage.

Medicare subsidizes those premiums, generally at an amount fixed at 74.5 percent of the average plan bid. The enrollee pays the remainder of the premium, which can vary based on generosity of coverage and other factors.


The insurers negotiate prices with drug companies and Medicare pays insurers additional amounts based on the quantity of drugs enrollees use and those negotiated prices.

Medicare requires participating insurers to offer a “standard coverage” plan, for which Congress rigidly defines enrollee deductibles and cost-sharing, as well as the rules for that second category of Medicare payments to plans.

Part D Coverage Redesign

The legislation would redesign and simplify the Part D benefit in three principal ways.

First, it would eliminate enrollee cost-sharing above a specified amount. Under current law, responsibility for paying for an enrollee’s drug consumption changes as the enrollee’s total drug spending rises. But enrollees always pay for at least a portion of the cost. As depicted in Figure 1, enrollees pay 100 percent of the cost of their drugs up to $415. They then pay 25 percent of the cost of their drugs until their out-of-pocket spending reaches roughly $1,266. Then, they pay either 37 percent (generics) or 83.3 percent (brand drugs) until their total out-of-pocket spending reaches $5,100. (Here, federal law mandates a weird and temporary price reduction where we pretend the manufacturer is paying part of the price.) Beyond that point, enrollees pay 5 percent of the cost of their drugs, without limit. 

The proposed legislation would cap enrollees’ out-of-pocket exposure at $3,100 in 2022 (indexed to growth in Part D spending). Beyond that point, enrollees would pay nothing for their drugs. (See Figure 2.) That’s a problem. All else equal (see below), eliminating enrollee cost-sharing above that threshold will cause Medicare spending to rise. When enrollees pay nothing for their drugs, they have little or no incentive to switch to lower-cost drugs or to avoid low-value expenditures. The elimination of cost-sharing above that threshold would lead enrollees to consume more and more expensive drugs, which would lead to higher Medicare spending. Fortunately, this is not the only change the legislation would make.

Second, the proposed legislation would reallocate responsibility for paying for an enrollee’s drugs between insurers and taxpayers. Under current law, the insurer pays nothing until the enrollee spends $415 on covered drugs. The insurer then pays 75 percent of the cost until the enrollee reaches $3,820 in total spending. The insurer then pays either 63 percent (generics) or 16.7 percent (brand drugs) up to roughly $8,140 in total spending. (This is again where that weird and temporary “manufacturer pays” fiction makes an appearance.) Above $8,140 in total spending, however, the insurer pays just 15 percent while the taxpayers pick up a whopping 80 percent of the cost. (The enrollee pays the remaining 5 percent, as discussed above.)

The proposal would increase the insurers’ exposure and reduce both the enrollees’ and the taxpayers’ exposure. (See Figure 2.) Insurers would still pay nothing below $415 of drug consumption. They would then pay 75 percent up to $11,155 of total spending. Above that amount, there would be another weird (but this time permanent) price reduction where we pretend the manufacturer is paying 20 percent of the cost. In effect, that’s a 20 percent price reduction, and the proposal would require the insurer to pay 75 percent—and taxpayers just 25 percent—of that reduced price.

That’s a good thing. When insurers pay a greater share of the cost of drugs above that threshold, they will drive harder bargains with drug manufacturers, and will do more to weed out low-value drug consumption. This change could even offset the incentives to over-consume that come from eliminating enrollee cost-sharing above that threshold. Indeed, the Congressional Budget Office projects that, on balance, this redesign would reduce Medicare spending by $35 billion over 10 years. Just to be sure, however, the Committee should continue to make Part D enrollees responsible for (at least) 5 percent of their catastrophic drug spending.

One final concern with this redesign is that while it would heighten the incentives for insurers to drive harder bargains with drug companies and develop more efficient plan designs, it could also heighten incentives for insurers to make their Part D plans unattractive to the sickest patients. That incentive exists anywhere government prohibits health insurers from pricing insurance according to risk. Evidence from the Affordable Care Act, Medicare Advantage, and Medicare Part D suggest efforts to subsidize plans according to the risk of the enrollees they attract (i.e., risk-adjustment programs) do not eliminate this perverse incentive. If the Part D redesign heightens incentives for plans to discriminate against the sick, it could encourage Medicare enrollees to seek coverage elsewhere, most likely in Medicare Advantage, where Medicare pays private insurers to provide integrated coverage to enrollees.

Part D Subsidy Cap

The second major change the legislation would make to Medicare Part D would be to institute a cap on the total amount of subsidies a participating pharmaceutical company may receive.

Under current law, drug manufacturers can charge Medicare Part D plans whatever prices they want. The only constraints they face are the relatively weak incentives for insurers and enrollees to refuse to pay those high prices. Indeed, for six classes of drugs, federal law effectively requires Part D plans to pay whatever prices the manufacturers set.

Under the legislation, participating drug manufacturers could continue to charge whatever prices they want but they would have to pay the federal government an amount equal to the excess of the increase in a covered drug’s price (specifically, the “wholesale acquisition cost” or WAC) above overall inflation. This requirement would discourage manufacturers from increasing their prices faster than inflation and could thereby reduce Medicare spending. The CBO projects this proposal would reduce Medicare spending by $50 billion over 10 years.

One concern with this “inflation cap” proposal is that drug manufacturers would game this requirement by launching new drugs at (even) higher prices. No doubt they would. Manufacturers are unlikely to get as much money out of taxpayers using this strategy as they do under current law, however. Manufacturers face greater price constraints when they are launching a drug that has zero customers than they face when increasing the price of a drug that has an established (and heavily insured) customer base. Heavily insured consumers tend to rebel when insurers try to impose price discipline on manufacturers by switching their enrollees to a different drug. Enrollees tend to rebel less when an insurer refuses to cover a drug that none of them have ever used. Insurers are therefore in a much better position to drive a hard bargain—i.e., to say no to excessive prices—at launch, when none of their enrollees are using a drug, than they are once their enrollees have begun using that drug. The CBO considered the incentive the “inflation cap” creates to set higher launch prices, yet still projected the proposal would save $50 billion over 10 years.

Conclusion

Rather than foster innovations that would make health care better, more affordable, and more secure, Medicare stifles innovations, overcharges enrollees and taxpayers, and provides low-quality coverage and care.

Fixing Medicare’s problems requires strong medicine. It requires, as Overcharged recommends, taking the money Congress would otherwise spend on Medicare and giving it to seniors as a means-tested and risk-adjusted cash payment; and then trusting seniors to spend that money, just as Congress trust them to spend their Social Security checks. Richer and newly cost-conscious seniors would spend that money much more carefully than the current Medicare program does and would finally impose discipline on our out-of-control health sector. 

This legislation’s Part D redesign and inflation-cap proposal are not the strong medicine Medicare needs. They are minor tweaks. They are hardly perfect. I would prefer that they not limit enrollee cost-sharing and that they impose an even tighter cap on Part D subsidies to drug manufacturers. But these proposals are steps in the right direction. They would not impose price controls on prescription drugs; they would give insurance companies incentives to drive harder bargains with drug manufacturers, to the benefit of taxpayers. They would not increase taxes on anyone; they would reduce wasteful Medicare spending and the burden of government by a projected $85 billion over 10 years.

The fact that these minor, commonsense tweaks to a bloated entitlement program are encountering strong opposition—again, mostly from those who would not make quite as much money off the taxpayers—illustrates one reason central economic planners, whether in Congress or the Medicare bureaucracy, are not competent to manage health care for 61 million Americans.

Much less 330 million. 

*The Cato Institute also published books in 2006 and 2001 about how corrupt Medicare is.