The Problem With Europe’s Budget Rules A Fix for Medicare Drug Spending

They are unpopular and unenforceable. The EU should invest more in infrastructure instead The whole system is going to be tough to reform. But this proposal shouldn’t be difficult

Europe needs wholesale reform of its fiscal framework, but it lacks the necessary political will and popular support. Until this changes, trying harder to promote investment would be more effective than just hoping for the best.

Europe’s rules require budget deficits to be no more than 3 percent of national income. Spain’s is 5.1 percent; Portugal’s 4.4 percent. In addition, countries are supposed to keep public debt at no more than 60 percent of income. Of the European Union’s 28 members, only three have consistently complied with both rules. At the moment, nine countries are subject to provisions of the so-called excessive deficit procedure, although the European Commission has recommended Cyprus, Ireland, and Slovenia be let off for good behavior.

In theory, violators can be fined as much 0.2 percent of gross domestic product. In practice, Europe doesn’t dare. What sense would it make to punish an economy, like Spain’s, that’s already struggling—not to mention the fact that it currently lacks a government? The EU is unpopular enough already.

Fully repairing the fiscal system requires a back-to-basics rethink and the creation of a limited form of fiscal union for countries that are members of the euro zone. For the moment, with voters looking askance at any and all EU initiatives, that’s out of the question. But two less radical approaches would help in the meantime.

First, boost public investment. The need is clear: Net public investment in many countries has been low for years and especially since the financial crisis; in Belgium, for example, it has been zero for decades. Infrastructure investment would create demand in the short term and boost growth in the long term.

A suitable institution exists for the purpose: The European Fund for Strategic Investments aims to attract private capital for worthy projects that require public support. Up to now, the EFSI has approved around € 9.3 billion ($10.4 billion) of financing for infrastructure projects. It’s a It’s hard to say which is crazier: Washington’s failed system for controlling drug costs or the resistance to a modest reform.

In addition to paying doctors for treating Medicare patients, the federal government also pays them 6 percent of the cost of any drug administered in their office. This gives doctors an incentive to prescribe the most expensive drugs available. The Centers for Medicare and Medicaid Services has proposed reforms in two stages. First, in August, the 6 percent fee would be reduced to 2.5 percent, plus a flat fee. Later, CMS wants to try what it calls value-based pricing strategies, such as paying doctors more for choosing drugs shown to be more effective.

Who would object to that? Just about everyone. Drugmakers say the current system “works to control costs.” (In reality, spending on this part of Medicare grew 17 percent faster than the program as a whole from 2005 to 2014.) Doctors groups argue the change will limit patients’ access to drugs and that Medicare should instead pressure drugmakers to lower their prices. In Congress, more than 300 Republicans and Democrats oppose the change, based on the theory that it will constrain patients’ and doctors’ choices.

These arguments are little more than fear-mongering. A more sensible system is easy to envision: Drugmakers can encourage doctors to choose products based on clinical effectiveness, not financial gain. If Medicare’s reimbursement rates are found to be too low, they should be adjusted directly, not through incentive payments that favor one drug over another. No doctor should refuse to administer a medically necessary drug simply because it’s not expensive enough.

Reforming Medicare as a whole goes beyond reducing the $20 billion it spent last year on drugs administered in doctors’ offices or hospital outpatient departments. Those broader fixes will require hard choices. This should be the easy stuff. <BW>