Yesterday, Sen Byron Dorgan (D-ND) officially introduced a bipartisan amendment to allow Americans to import foreign drugs. “My goal isn’t to ask the American people to buy their prescription drugs overseas, my goal is that if we allow the American people to do that, the pharmaceutical industry would be required to re-price their drugs in the country,” Dorgan said, stressing that “the American people pay the highest drug prices in the world for brand name prescription drugs.”

In other words, rather than regulating the pharmaceutical industry domestically, Dorgan wants to rely on foreign regulations. It’s a round about way of getting at the problem of skyrocketing drug prices — but it makes for effective political rhetoric.

From Dorgan’s rather convincing explanation of the problem:

- Drug prices increased 9.3% this year, during a period of national deflation.

- The industry creates demand for drugs through ubiquitous advertising, and then increases prices for American consumers.

- Americans pay 3 to 4 times more for brand name drugs than consumers in Europe and Canada.

- A substantial number of the drugs developed and produced by the pharmaceutical industry were developed at the National Institute of Health.

Watch a compilation of Dorgan’s presentation:

It’s an argument for letting someone else fix the drug price problem. But if policy makers can iron-out the logistical and safety issues (and lawmakers are reluctant to take on the drug industry), why not try it? After all, even President Obama and White House Chief of Staff Rahm Emanuel supported reimportation.

Now, Obama’s Food and Drug Administration opposes it. The Dorgan amendment “would be logistically challenging to implement and resource intensive. In addition, there are significant safety concerns,” FDA administrator Margaret Hamburg wrote in a letter. Dorgan contends that some FDA-approved drugs are already manufactured at FDA-approved foreign plants and that 40% of active ingredients in American drugs are important from India and China.

Ultimately, if the administration wants to retain the industry’s support for broader health care reform, that’s understandable. But it must also take this opportunity do something to address rising drug costs and the disparity in pricing.

Throughout the Senate health care debate, Republicans have accused Democrats of raiding Medicare to “establish a new entitlement” and reducing “the benefits our seniors depend on.” Republican senators introduced at least five different amendments to “protect Medicare” and its beneficiaries from health care reform and unanimously voted for an amendment to ensure that seniors will continue to receive all of the guaranteed Medicare benefits “that they rely on:”

SEN. MIKE CARPO (R-ID): “The Gregg amendment simply says let’s create a lock-box for Medicare, the same kind of lock-box we need for Social Security to prevent Congress from continuing to raid Social Security. And let’s put into place to assure that all of these great statements on the floor about how we want to protect and preserve Medicare are enforced. ”

SEN. MITCH MCCONNELL (R-KY): “There is only one way to protect Medicare and that is to support the McCain amendment.”

SEN. ORRIN HATCH (R-UT): “Everyone knows Medicare is extremely important to the 43 million seniors and disabled Americans covered by the Medicare program. Throughout my Senate service I have fought to preserve Medicare for both beneficiary and providers.”

Watch it:

Republicans’ new-found support for the Medicare program seems disingenuous. Despite having “a long track record of philosophically opposing Medicare and actively seeking to reduce its funding,” Republicans have offered numerous amendments to preserve the overpayments for private insures participating in the Medicare Advantage program. Those subsidies increase the cost of coverage for beneficiaries in the traditional Medicare program and reduce the life of the Medicare trust fund.

The hypocrisy became even more apparent when the very same senators who claimed to support Medicare and “protect it,” quickly dismissed the idea of opening the “extremely important” program to new enrollees. Forced to respond to a Democratic proposal that if properly designed, could extend the solvency of the Medicare trust fund by bringing in premium dollars from younger beneficiaries and ensure that Americans between 55 and 65 benefit from continuous care and are healthier once they reach Medicare age, Republicans refused to even consider the option. They reverted to criticizing the program they had vowed “to protect.”

“The problem with that, by anyone’s analysis, is that Medicare is due to be insolvent by 2017,” Sen. Mike Johannis (R-NE) said yesterday on CSPAN’s Washington Journal. “All of the sudden we open up this program up to a whole new list of beneficiaries? It doesn’t serve anyone’s purposes well. It’s not good for Medicare, it’s not good for the people who depend on Medicare.”

“We all know that the Medicare program has $37 trillion in unfunded obligations. We all know about the pending insolvency of the medicare program, the trustees say so every spring,” Sen. Chuck Grassley (R-IA) said yesterday on the floor of the Senate. “Adding millions more Americans to Medicare on top of the half a trillion dollars in Medicare cuts in this Reid bill would make beneficiaries access to care much worse.”

The ink hasn’t dried on the public option compromise but a coalition of hospitals, doctors, insurers and certain lawmakers are already opposing a provision that would allow Americans between 55 and 64 to buy coverage in the Medicare program. Opponents argue that Medicare’s lower reimbursement rates would shift costs to private payers and disadvantage hospitals in rural districts. Some even claim that expanding Medicare would add more individuals onto the rolls of a program that’s going broke:

- Federation of American Hospitals: “Any Medicare Buy-In would invariably lead to crowd out of the private health insurance market, placing more people into Medicare….A Medicare Buy-In would involve Medicare rates; would be controlled by CMS; and would crowd out older workers with private coverage who may choose early retirement as a result.”

- American Medical Association: “The American Medical Association said it opposes expanding Medicare because doctors face steep pay cuts under the program and many Medicare patients are struggling to find a doctor.”

- Sen. Byron Dorgan (D-ND): “We have the lowest Medicare reimbursement rates in the country in North Dakota, we’re at the bottom or second to the bottom. We’d have to straighten out the reimbursement rates before I’d want more buy-in to Medicare at current rates.”

While the Senate legislation recognizes that Medicare does underpay certain providers — and addresses the issue by providing primary care practitioners and general surgeons practicing in health professional shortage areas with a 10 percent Medicare payment bonus for five years beginning in 2011 — the industry’s arguments are largely overstated.

As Ezra Klein explains, according to the latest MedPAC report, “Relative to urban hospitals, Medicare’s payments actually covered a slightly higher percentage of rural hospital costs.” Medicare pays all hospitals the same base amount of money to treat a certain condition, but “adjusts” these payments for overhead and other factors. “Medicare uses the hospital’s own data to make adjustments to the base rate to account for these differences,” suggesting that rural hospitals aren’t under paid for the services they provide. Rather, they receive less than urban hospitals because they provide less services, rely on failing business models — “the areas they serve are shrinking, but the services demanded by customers are increasing” — or “have monopolies over their local areas.”

The last point is crucial to the ‘cost-shift’ argument. MedPAC has concluded that “hospitals that are forced to run efficiently are adequately funded by Medicare payments. That is, Medicare payments are sufficient to cover costs but some hospitals run inefficiently and make it appear otherwise.” The research suggests that hospitals “are raising prices when they have the market power to do so,” not because they are reimbursed at Medicare rates. As the Congressional Budget Office points out, periods of increased competition between providers have “led to a limited amount of cost shifting and also encouraged hospitals to adopt cost-containment measures.”

In other words, critics confuse cost shifts with price differentials. Economists point out that “price differentials are not necessarily the recouping of losses from one payer by overcharging another”; providers often “charge different prices to different market segments” to maximize profits, not to shift costs.

Significantly, the buy-in could also extend the solvency of the Medicare trust fund and undermine critics who argue that the policy is adding more Americans to a “sinking ship.” By bringing in premium dollars from younger beneficiaries and reducing Medicare’s spending for those individuals after they turned 65, the program could stay solvent for longer.

Last night, Senate Democrats reached a deal to replace the opt-out public option in the Senate health care bill with a network of nonprofit insurers administered by the Office of Personnel Management (OPM)— the entity that runs the Federal Employees Health Benefits Program (FEHBP). Americans between the ages of 55 and 64 could also buy into the Medicare program before the exchanges become operational and enroll in Medicare from within an exchange.

Lawmakers have sent the details of the proposal to the Congressional Budget Office (CBO) for scoring and are hoping to officially unveil the plan early next week. Some more details:

- Nonprofit insurers administered and regulated by the OPM: If the entity acts as a prudent purchaser and only selects the most efficient nonprofits, the plans could provide quality care at lower costs and generate significant competition within the exchanges.

- Nonprofit insurers offer national plans: These plans would be regulated by new national standards and would not be subject to the political whims of the states. The national rules would act as a “floor” that states could build and improve on. Insurers might also be able to pull risk across the country and win greater leverage with providers.

– New insurance regulations: Insurers would be required to spend “at least 90 percent of premium money on medical care, rather than on administrative costs or profits.” This is up from 85 percent.

- A triggered public option: In the unlikely event that insurance companies don’t participate in the OPM-operated network of nonprofits, a national public plan — along the lines of what the House has offered — could be triggered.

The Medicare expansion is significant but could also become significantly expensive. “For the period between 2011 and 2014, when the exchanges do open, the Medicare option will not be subsidized–people will have to pay in without federal premium assistance.” “After the exchanges launch, the Medicare option would be offered in the exchanges, where people could pay into it with their subsidies.” Clinton era reforms sought to expand the Medicare program but were never able to provide enrollees with affordable premiums on an unsubsidized basis. At this point, it’s unknown how many Americans could afford to enroll in the Medicare program, but some back of the envelope estimates provided to the Wonk Room suggest that as many as 4 million Americans could join.

According to a CBO analysis of a similar Medicare buy-in for uninsured Americans between 62 and 64 — that group would have to pay a premium plus an administrative fee of 5 percent — “the annual premium for single coverage in 2011 would be about $7,600 (that figure includes the cost of Part D coverage).” The CBO assumed that the Medicare buy-in policy would increase outlays for Social Security retirement benefits “because the availability of the Medicare buy-in program would induce some people to retire sooner than they otherwise would have (because they would no longer need insurance from their employer).” Significantly, the buy-in could also extend the solvency of the Medicare trust fund by bringing in premium dollars from younger beneficiaries and reduce Medicare’s spending for those individuals after they turned 65.

Finally, the OPM-administered network of nonprofits may not be the robust public option reformers were hoping for, but prudent purchasing would guarantee that insurers operate with a low administrative overhead and provide coverage at very competitive prices. As the process moves forward, lawmakers could certainly build on the proposal (and encourage nonprofits to offer coverage at lower costs) by modifying the trigger to affordability levels or the growth of national health care expenditures (rather than number of nonprofits participating) and introducing a new trigger that would expand the buy-in eligibility age if national health care expenditures don’t decrease by a set amount over time.

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