Amid all the criticism and outrage about the new Medicare Bill (the "Pill Bill"), no good explanation has emerged for the odd shape of it's fiscal structure. If this was redistricting, we would recognize it... as a gerrymander. It is unfortunate that this strange fiscal shape has largely drawn a pass: as just plain weird, or just plain mystifying.  On close inspection, it turns out to be both a careful design, and the Pill Bill's crucial feature.

Here's a brief and approximate summary of the annual terms. From $0 to $2,250 most seniors pay a $35/mo premium and a $250 deductible -- Medicare pays 75% from $250 to $2,250. For $2,250 per year in drug expenses Medicare pays a net of $1,080 -- a little less than half. When a senior goes over $2,250 per year, in most cases the senior pays 100% of the next $3,600. When a senior's annual drug bills reach $5,850, Medicare recommences, but now at 95%.

The Bush Pioneers now control the Federal Government, and have what amounts to the full powers of "product-development" authority for new legislation. Therefore, to explain and to understand, we can usefully take a marketing point of view to find the underlying explanation for the Pill Bill's strange fiscal shape.  When we do this, the Pill Bill emerges as the trifecta of New Deals: one for the middle class, one for the Bush Pioneers, and one for the drug companies.

First, let's hear how this New Deal might sound to the middle class: “We delivered folks! Those pillow-pounding Hillary-sounding Deem-o-crats huffed and puffed 'till my foot in my mouth was blew in my face, but we did it!  Medicare pays 75% from $250 to $2,250.  It works like this folks... I've got $4 here, so Medicare pays $3, and you only pay $1. That's $1,500 dollars! But you know folks, we've got some real spending problems in Washington. We had to put a special safety cap on your Pill Bill. We've got you covered up to $2,250. Beyond that you're on your own. For those of you with serious health problems, we're compassionate conservatives.  Once you prove you really need it... by climbing over our $3,600 fiscal security barrier... you'll be in Medicare's special green pastures." 

Of course, this is somewhat misleading.  It sounds like Medicare will pay up to $1,500 of a person's drug bill (not $1,080, the actual net cost). One of the multiple and fundamental dangers of the Bush Administration is this: it is conditioning America to accept misleading statements, deceptions, and half-truths as normal. 

Next, let's listen to what the Bush Pioneers will hear about their New Deal: “We've got bad news and good news on the Pill Bill. First, the bad news: there's a $4,770 deductible ($2,250 + $3,600 - Medicare's $1,080). Now the good news: Medicare will pay 95% of the rest – for any combination of the fanciest, patented, designer drugs you want. Be creative... enjoy... you can drive both medical research and your SUV!”

Suppose a Bush Pioneer can benefit from $10,000 of Bush Rx. Medicare pays about half. Let's push the envelope, and assume the cost is $20,000 of the best designer drugs for... whatever. Medicare pays about 75% of the total, and 95% of the marginal cost.

The structure of this New Deal is more complicated for drug companies, but untangling it is highly instructive. 

First, drug companies can safely continue a business strategy of price segmenting by country, with lower prices in Canada, and very low prices in Africa.  The key point here is that the marginal cost to manufacture drugs is often only pennies on the dollar compared to total costs. When marginal costs are low enough, a drug company can sell products in Africa for pennies a pill, and still make more profit than if they didn't make that sale. 

Second, the $3,600 Medicare coverage gap is part of a careful, overall design with both the intention and the effect of splitting the U.S. market into two segments. Again, to explain and to understand, a stimulus/response approach is a useful means to examine how the Pill Bill works for both market segments. 

For the middle class market, the Pill Bill stimulates production of low-cost patent-expired drugs with a subsidy that approaches 50% for some consumers (the aggregate market subsidy is lower).  However, the subsidy structure will be perceived differently by the middle class.  Because Medicare's 75% marginal subsidy ends (for most people) at $2,250, the Pill Bill will stimulate most consumer to immediately prefer the patent-expired drugs.  This is because consumers will understand, correctly, that their marginal cost is 25%, and they won't want it to jump to 100%. 

The $3,600 "fiscal security barrier" is designed to buffer competition between patented and patent-expired drugs. Here's how the Pill Bill's stimulus/response system works for the high-end market:  For drug companies, Medicare 95% high-end payment is stimulating -- the sky's the limit for prices on the newest and best patent-protected, high-end products. High-end consumers will be conditioned by both Doctors and Bush Pioneers to demand expensive drugs from the start -- using this simple and truthful argument: "Since your total drug bill will be high this year, you might as well get the best drugs right away, because the total cost to you will only go up or down by 5% (Medicare pays 95%) whatever you get."  Once a patient understands how this system works, the stimulus effect of Medicare's 95% subsidy starts immediately -- the patient will demand the best, most expensive drugs right from the start.

With two separate markets, expensive TV advertising also becomes unnecessary. Why waste millions to irritate millions by telling them about drugs they can't afford? Doctors and preferred customers will get all the information they need to ensure a flow of highly subsidized new "designer drugs" to the high end of the market.  Much of this information is likely to come from the direct marketing activity of the Bush Pioneers.  Specifically, Doctors will know which patients are on a budget, and which patients need, or want-and-can-afford, enough drugs to reach the special 95% "Medicare green pastures". 

Economics teaches us that marginal cost drives each company's production decision in competitive markets.  The Pill Bill conditions the market by using a strangely shaped but highly effective marginal cost structure to drive both production and consumption decisions.

The fairness or unfairness of the Pill Bill can and will be debated (by people who believe in Freedom and Dignity)... and spun (by organisms who operate against Freedom and Dignity).  However, the GOP is deserving of credit for one major accomplishment. They appear to have figured out a way to promote the economical manufacture of patent-expired drugs. If the Pill Bill has the effect of continuing and increasing production of patent-expired drugs, the low marginal cost of manufacturing these drugs has the potential to benefit people in third world countries greatly.  In years to come, the implicit economic model behind the Pill Bill is likely to become an emerging subject of political debate... a similar approach can be taken in areas other than medicine... but that's off-topic for now. 

The Pill Bill, with it's gerrymandered fiscal structure, can and will be marketed as a kind of catastrophic coverage, and it does function that way for the middle class. There will be upbeat, compassionate conservative stories about real middle class people who benefit significantly from this structure. These stories will be true. As with lottery winners, you only need one for a news story. Meanwhile, back at the ranch, the fiscal impact of this bill's structure, which the bought-and-paid-for GOP is almost certain to fight to keep, will be a transfer of wealth from the middle class to the Bush Pioneers. Unfortunately, this overall fiscal impact is a difficult-to-see side effect, because it's... well... fuzzy math stuff.

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