Federal officials recently set off budgetary alarm bells with new data on Medicare prescription drug spending. The Centers for Medicare and Medicaid Services pegged Medicare Part D’s 2013 price tag at $103 billion.
That’s a large number — and largely misleading. A closer look at Part D reveals a program that is working very well at delivering essential services while keeping costs down. The key to the success of Part D has been its ability to harness market forces for the benefit of participants and taxpayers alike.
Implemented in 2006, Part D gives seniors and the disabled access to prescription drugs, which Medicare previously didn’t cover. Today, 36 million Americans can afford essential medications thanks to this program.
Part D has cost less than expected year after year, making it nearly unique among government programs. From 2004 to 2013 Part D cost $349 billion — 45 percent less than originally predicted. In 2014, the Congressional Budget Office lowered its projection for total Part D spending by $56 billion.
he program’s innovative free-market structure enables it to keep costs low. Rather than relying on one-size-fits-all rules for coverage and pricing set by the federal government, Part D allows private-sector insurers to design plan coverage and set premium levels, then compete among themselves for seniors’ business.
This competition keeps costs down. This year, the average monthly Part D premium is $32 — nearly 50 percent less than the initial 2004 projection of $60.
Competition also encourages insurers to offer a wide variety of plans to cater to beneficiaries’ different needs. In 2015, insurers offered more than 1,000 plans nationwide. With multiple options to choose from, patients can enroll in a plan that meets their medical needs — and their budget. In the first year of the Part D program, beneficiaries cut their out-of-pocket medical expenses by an average of $300 by switching to more tailored plans.
Part D further saves seniors and taxpayers money by encouraging insurers to negotiate with pharmaceutical manufacturers to secure rebates on medicines covered in insurance plans.
According to the Medicare Trustees, rebates on brand name drugs often reach 20-30 percent or more. For instance, Nexium — the top medication by cost, according to CMS — carries rebates of more than 60 percent in most Part D plans. Insurers ultimately pass these savings on to beneficiaries and taxpayers.
Unfortunately, the recent CMS analysis simply ignored such rebates when it calculated Part D’s cost at $103 billion. The non-partisan CBO says the real figure is $62 billion — just 10.6 percent of overall Medicare spending.
The recent CMS data also fails to take into consideration the way Part D encourages the use of cheaper generic medications. Generic usage among seniors jumped to 84 percent in 2013 — a 55 percent increase since 2005. In other words, generics account for more than four of every five Part D prescriptions.
In addition to lowering the cost of medications for seniors, Part D lowers overall healthcare costs by reducing the need for other medical services. Consider patients with congestive heart failure. A recent study concluded that, by granting those patients better access to medicines, Part D cuts Medicare spending on hospitalizations and other medical services by $2.3 billion every year.
The same is true for beneficiaries with many other diseases. A different study concluded that enrollment in Part D decreases a senior’s chance of hospital admission by 8 percent.
CMS’s misrepresentation of Part D spending isn’t merely misleading — it could spur federal officials to interfere in the program. Already, some politicians want bureaucrats, not insurance experts, to negotiate rebates from pharmaceutical companies.
According to the CBO, government interference wouldn’t save Medicare money. But it would undermine the free-market competition that has made Part D a resounding success.
Part D should serve as a model of how private-sector competition can lower healthcare spending while delivering quality, affordable care.