The Lessons of Medicare Part D
By DAVID WESSEL
Four years ago, the U.S. government offered subsidized prescription-drug insurance to 43 million elderly and disabled, the biggest expansion of government-backed health care in decades. Today, the program is working better than many expected. Now academics are drawing lessons that are acutely relevant to heath-care legislation pending in Congress.
Medicare Part D did lead the elderly to use more drugs. (That's unsurprising, but pleases economists because it confirms their predictions that when government subsidizes something, people use more of it.) More important is the conclusion from Nobel laureate Daniel McFadden of the University of California at Berkeley: "Medicare Part D … has achieved its primary political goal of providing near-universal coverage in a viable private market." (Link for paper)
Some early lessons:
Markets do work, but...
In Medicare doctor and hospital insurance, the government generally chooses benefits and sets prices. In Part D, there is no government plan; the typical elderly person has a choice of 40 plans, all sponsored by private insurers whose offerings are supervised by the government. Few elderly pick really lousy plans; the government makes sure no really lousy plans are offered, an important lesson for the "exchanges" at which many Americans would shop for private health insurance under the pending bill. Jonathan Gruber and Jason Abaluck of the Massachusetts Institute of Technology, with data on 2.7 million Part D enrollees, find that 70% could have chosen a lower-cost plan, and the typical enrollee could have saved about 25%. (Link for paper.) Consumers focused too much on premiums, not enough on out-of-pocket spending. It's a reminder that elaborate cost-sharing formulas don't guide consumers well if they're too complicated for consumers to understand.
"Markets definitely work," says John Hsu, a physician-MBA at Harvard Medical School. "However, they don't always work according to original assumptions. It's very important to examine each step very carefully to look for unintended consequences."
Prices don't always do the predictable.
The early fear was that arming the elderly with subsidized drug insurance would increase demand and thus drug prices, especially since Congress barred the government from negotiating drug prices directly. That task was left to the private insurers.
Insurers had strong incentive to bargain hard. Mark Duggan of the University of Maryland and Fiona Scott Morton of the Yale School of Management conclude, "Moving consumers into Medicare Part D plans significantly reduced the per-dose price paid to manufacturers." (Link for paper.) Average price cut: 12%. Why? "An individual consumer typically does not have the knowledge of which drugs are acceptable [cheaper] therapeutic substitutes; the consumer's physician typically has poor knowledge of [drug] prices and any one consumer is too small...to negotiate with a pharmaceutical company."
That strengthens the case for harnessing private insurers to restrain health costs, but doesn't mean drug prices couldn't be lower still. The Medicaid program for the poor and the Veterans Administration get even lower drug prices. That matters particularly to the elderly poor who may pay more for drugs because they were switched to Medicare Part D from Medicaid.
One countervailing force: an uptick in drug-company ads aimed at elderly consumers. In unpublished work presented at the American Economic Association this week, Darius Lakdawalla of the University of Southern California compared direct-to-consumer ad spending on drugs with no Medicare use with ad spending on drugs typically used by Medicare patients. After Part D kicked in, spending on the latter rose 60% above spending on drugs with no Medicare users.
Programs never cost what the experts predict.
Economy-wide growth in drug spending slowed surprisingly sharply. "This sharp deceleration in growth rates was unexpected by us, CBO, and most industry experts," CMS chief actuary Richard Foster said in an email to Slate's Tim Noah. "It occurred largely as a result of effective efforts by health-insurance plans to induce people to use generic equivalents and a slowdown in the number of new "blockbuster" drugs coming into the market." Projections are always wrong, he notes, but still essential to wise policy making.
Health care is never simple, though. Higher drug spending pulled down hospitalization of the elderly for diseases treatable by medicine, such as diabetes. "It did make them healthier and keep them out of the hospital," Michael Chernew of Harvard Medical School said at an AEA presentation.
Of course, Congress is often happy to spend those savings and more. Douglas Holtz-Eakin, CBO chief when the drug bill passed, notes that Congress now is contemplating filling "the doughnut hole" -- out-of-pocket spending on drugs that wasn't covered by the original plan. "Every entitlement program gets richer over time," he says.
