While Medicare as a whole is a fiscal basket case -- due to run out of money in 2024 -- Part D has been the very model of a well functioning federal program since its implementation in 2006.
The Congressional Budget Office (CBO) found that, between 2004 and 2013, Part D will cost an extraordinary 45 percent below what was initially estimated. Premiums for the program, meanwhile, are roughly half of the government’s original projections. Part D enrollees pay, on average, $30 a month -- a rate that has remained essentially unchanged for years. It’s no wonder that beneficiaries are so pleased with the program. In fact, 96 percent of those enrolled in Part D say that their coverage works well.
These unprecedented results are largely due to Part D’s market-based structure. Beneficiaries are free to choose from a slate of private drug coverage plans, forcing insurers to compete to offer the best options to American seniors. It’s hardly surprising that the program has led to low prices and satisfied customers.
Through their own negotiations with drugmakers, private insurance plans that operate under Part D have already had great success in keeping pharmaceutical prices down. In fact, the CBO has observed that Part D plans have “secured rebates somewhat larger than the average rebates observed in commercial health plans.”
What’s more, the CBO has said time and again that doing away with the non-interference clause “would have a negligible effect on federal spending.” In a report from 2009, they reiterated this view, explaining that such a reform would “have little, if any, effect on [drug] prices.”
Smart partnerships between government and the free market work. They work at keeping costs low and – most importantly – improving care. As JAMA reported, “Implementation of Medicare Part D was followed by increased use of prescription medications, reduced out-of-pocket costs, and improved medication adherence.” And this, in no small measure, significantly reduces more drastic medical interventions -- which in turn reduces our overall national health care spending.
A new report from the Manhattan Institute, “A Decade of Success: How Competition Drives Savings in Medicare Part D,” details many of the reasons why a free-market approach to healthcare access is not only working – but a model for how to design future healthcare partnerships between Uncle Sam and the private sector.
Here is the report’s executive summary:
National trends are not a sufficient explanation for Part D’s success.
While patent expirations are part of the story—national drug spending as a whole slowed during the period we examine—they are far from the full explanation for large overestimates in Part D spending (indeed, patent expirations were likely captured in the original projections). Instead, the available evidence indicates that private-sector firm-level innovations, including preferred pharmacy networks and aggressive negotiations with drug manufacturers, have played a significant role in keeping the program’s costs below projections. We find that broader market trends (e.g., patent expirations and other changes) account for only about half (56 percent) of the program’s performance. The remainder—44 percent—of Part D’s lower-than-estimated cost savings is attributable to factors not captured in national prescription drug trends, which should include competition between Prescription Drug Plans (PDPs). This is strong evidence indicating that consumer-driven competition in Part D has been critical to the program’s financial success.
Consumer-driven competition is a relatively new tool in the government’s effort to control health-care costs.
In hindsight, government overestimates of Part D’s costs are not surprising, since the program utilizes a model of consumer choice (robust competition among dozens of regional drug plans and Medicare Advantage plans) that has no perfect analogue in other government health plans, such as Medicaid.
Part D is an excellent model for future health-care and entitlement reforms.
Arguably, Part D and Medicare Advantage plans represent the first national health-care exchange (the Federal Employees’ Health Benefits Program [FEHBP] is a close cousin). While the Affordable Care Act (ACA) operates a similar exchange concept, there are important differences. First, Part D plans compete in large regional areas, not states (this creates much bigger risk pools because even large states are incorporated into larger regions), as the ACA exchanges do. Even the federal exchange is layered on top of a state-regulated insurance market. This potentially limits the ability of plans to create economies of scale to bargain with providers and to utilize innovative tools to arbitrage cost and quality differences across state markets (preferred pharmacy and mail-order networks in Part D; telemedicine and medical tourism to “centers of excellence” for health-insurance plans). Notably, while Part D includes higher subsidies for sicker seniors (typically, the low-income subsidy population), it does not penalize healthier seniors through higher premiums, as the ACA’s community rating provisions do. Arguably, a better approach would be to rely more on backdoor (non-cross-subsidized) risk adjustment of plans and larger subsidies for sicker or older patients, while allowing plans to charge actuarially fair premiums to younger enrollees. The cross-subsidies in the Part D approach are more transparent in that sense, since they come from tax revenues rather than from private premiums.
The complete MI report can be found here.
