Medicare is inefficient and expensive. Medicare has been expanded through Medicare Part D, which covers prescription drugs. Can expanding an inefficient, expensive system be a good thing? Gary Becker argues yes.
Since drugs have high fixed research costs but low marginal costs, having the government pay for drugs can increase innovation. In fact, a working paper by Blume-Kohout and Sood (2008) finds that “…the passage of Medicare Part D was associated with significant increases in pharmaceutical R&D, especially for classes with high elderly market share.” Further, the fact that there are high fixed costs and low marginal cost means that passing Medicare Part D will likely reduce the average cost of drugs. According to Becker:
This property of the cost of producing drugs has two extremely important implications for Medicare costs. The first is that drugs are an efficient way to treat diseases and disorders that hit a large number of men and women since then the fixed costs can be spread over a larger number of users. This makes them particularly valuable to the elderly who are a growing share of the population in the United States and all other developed countries, and in many developing countries as well, including China…
Drugs are also valuable in inefficient delivery systems that have trouble choking off medical treatments that would not pass a benefit-cost calculation. This would characterize systems with highly subsidized medical care, with excessively low deductibles, or with rules that cannot deny treatments to the very elderly and those close to dying who would benefit only a little from receiving treatment. Surgery, hospitalization, and close physician supervision are expensive ways to treat seniors who do not benefit much from this care since the cost of these procedures tend to rise in proportion to the number treated. On the other hand, while treating seniors with drugs sometimes also may not add much in the way of benefits, the additional cost per user would be much smaller than the average cost per user.
Medicare Part D may increase efficiency in the “second-best” world in which we live today.