Most of you probably remember how the Medicare prescription drug benefit, Medicare Part D, was passed in 2004. The Bush Administration rammed the bill through Congress without allowing the Congress critters to see the CBO estimates of what it would cost.

A big reason Medicare Part D added billions of dollars to the federal deficit is that the law that created Part D forbids the government for negotiating for drug prices. Part D works a lot like Medicare Advantage, which is that it pays private insurance companies to offer prescription drug benefits to seniors. The prices of drugs are negotiated between the insurance companies and the pharmaceutical companies.

By 2007, reports were coming out that Medicare Part D was paying 58 percent more, on average, than the Veterans Administration paid for the same drugs. Part D was a huge giveaway to Big Pharma, which was financed through deficit spending, since the Bushies refused to raise taxes to pay for it.

Further, when the law went into effect in January 2006, 6.5 million seniors and disabled people in the Medicaid program were transferred to Medicare Part D for their prescription drug benefits. This group was called “dual eligibles,” since they got most of their health care through Medicaid but prescription drugs through Medicare Part D. The New York Times reported in 2006 that this shifting of programs was a windfall for the pharmaceutical industry:

The pharmaceutical industry is beginning to reap a windfall from a surprisingly lucrative niche market: drugs for poor people.

And analysts expect the benefits to show up in many of the quarterly financial results that drug makers will begin posting this week.

The windfall, which by some estimates could be $2 billion or more this year, is a result of the transfer of millions of low-income people into the new Medicare Part D drug program that went into effect in January. Under that program, as it turns out, the prices paid by insurers, and eventually the taxpayer, for the medications given to those transferred are likely to be higher than what was paid under the federal-state Medicaid programs for the poor.

Under Medicaid, the federal government and state agencies purchase drugs from pharmaceutical companies at the “best price,” meaning the lowest price negotiated by private insurance companies or any other purchaser. These prices are watched closely, and the drug companies sometimes are required to rebate money back to the government if it is discovered somebody else got a better deal.

Needless to say, Medicaid pays a lot less for the same drugs than Medicare Part D pays. This year the CBO estimated that if the “dual eligible” beneficiaries were receiving drug benefits under the Medicaid pricing system, over ten years the federal government would save up to $112 billion dollars (see chart on page 54).

Now, for all the hollering Republicans do about how Medicare is going broke, a sensible person would assume they’d jump at the chance to save $112 billion without cutting benefits. However, “sensible” and “Republican” haven’t lived in the same zip code for some time.

A proposal to make this very change was made in the House recently, and for a time many Republicans supported it. Jonathan Cohn describes how House Majority Leader Eric Cantor led a charge against the bill, however. Note that Big Pharma donated $168,000 to Cantor’s re-election campaign in the last cycle.

Cantor is getting his talking points from the usual sources — think tanks like the Heritage Foundation and the American Enterprise Institute. The Heritage argument is classic think-tank rhetoric — much alarm is expressed, and buzzwords like “price controls” and the superiority of “market based structures” are drizzled throughout.

But taken as a whole, the argument makes no sense. It’s not exactly word salad, but something like ideological bullet list salad. Changing Medicare Part D would cost too much! (Saving $112 billion costs too much?) Seniors would have to pay higher drug prices! (Actually, pharma raised drug prices after Medicare Part D went into effect; see the New York Times article linked above.) Quality of care would suffer! (That only makes sense if you think Lipitor works better if you pay more for it.)

Jonathan Cohn links to more rebuttals of the rightie arguments. See also this 2008 article from Health Affairs, which pretty much demolishes all of the Heritage arguments, including the argument that the “rebate system” stifles innovation.