American seniors recently received some good news they wont be seeing higher premiums in 2012 for their Medicare prescription drug benefits. In fact, the rates they pay for prescription drug coverage under Medicare Part D will decline this coming year, according to the U.S. Department of Health and Human Services (HHS).
HHSs announcement comes on the heels of a new Harvard study published in the Journal of the American Medical Association that concluded that Part D is generating savings not just for seniors, but for the Medicare program as a whole.
Better health outcomes at lower prices? What gives? The answer lies in Part Ds structure, which relies on private firms competing to deliver the best benefits at the lowest price.
Heres how it works. Insurance plans compete with one another to negotiate the best possible prices from drug makers and pharmacies for their wares. They then turn around and compete again to attract customers by offering low prices, different mixes of benefits, and co-pays or deductibles that meet seniors health and financial needs.
Several years of evidence are in and its clear that Part D is the rare government program that comes in under budget with better-than-expected results.
The Congressional Budget Office now estimates that Part D will cost 46% less than initially projected between 2004 and 2013.
Beneficiaries are enjoying savings, too. In 2012, Medicare subscribers can expect an average monthly premium of just $30 about a dollar less than in 2011. When the program was originally proposed, the CBO predicted that those rates would be nearly twice as high. Forty percent of prescription drug plans offer a zero-dollar deductible.
Its no wonder that 84% of seniors say that theyre satisfied with their coverage under Part D.
Even better, data suggest that the money spent on Part D generates savings throughout the rest of the healthcare system.
The Harvard study found that the drug benefit saved Medicare about $1,200 per senior each year in hospital, nursing home, and other costs. Across all Medicare enrollees, that amounts to about $12 billion in savings each year.
Another recent study found that Part D reduced rates of hospitalization for so-called ambulatory care-sensitive conditions. The medical community believes that hospitalizations for these common conditions like complications from diabetes and hypertension are unnecessary with good outpatient care and early intervention.
How can spending money on drugs generate savings? Simply by obviating the need for more expensive medical procedures down the road.
Indeed, Columbia University professor Frank Lichtenberg has shown that drug spending more than pays for itself by yielding lower health spending elsewhere. For every additional dollar in pharmaceutical expenditure, total hospital care expenditures decline by $3.65.
Part D improves access to medications and in so doing promotes adherence to treatment plans that can control chronic conditions. By keeping these diseases in check, the drug benefit guards against potentially costly medical interventions in the future.
The drug benefits structure illustrates how competition can help drive down health costs. Policymakers should be looking to build upon Part Ds successes, as America simply cannot afford the costly status quo. After all, average annual health spending is expected to outpace the rate of economic growth by 1.1 percentage points through 2020. By then, health care will consume nearly 20% of our countrys economic output.
Medicares fiscal situation is even worse. Spending on the program is projected to grow by 6.3% each year through the end of the decade.
The course of action is clear. Our leaders shouldnt inject more government into the healthcare marketplace. Instead, they should heed the lessons of Part D by swearing off price controls, continuing not to interfere with negotiations between insurers and drug makers, and most importantly, by fostering more competition within the healthcare system.