Chairman Ryan and the Medicare Part D Myth

House Budget Committee Chairman Paul Ryan claims that his troubling proposal to convert Medicare into a premium support system — where beneficiaries would receive a voucher to buy private coverage or traditional Medicare — would control costs.  He notes that the Medicare Part D drug benefit, which private insurers provide, has cost much less than the Congressional Budget Office (CBO) expected.  He says that the lower spending reflects efficiencies produced by competition among private insurers.

But, as our analysis from last year (which we issued after Chairman Ryan started making these claims) explained, Part D’s reliance on private plans had little to do with its lower-than-expected costs.  The primary factors were:

• Prescription drug spending growth throughout the U.S. health care system slowed sharply just as Part D got up and running.  That’s because fewer blockbuster drugs were coming to market, major drugs were going off-patent, and consumers were using more generic drugs.  In fact, overall U.S. prescription drug spending was about 35 percent lower in 2010 than CBO had projected back in 2003, when Congress created Part D.  Medicare’s trustees have explained that this system-wide slowdown was a key factor in reducing Medicare drug spending below original projections.

• Part D enrollment was lower than expected.  In 2010, only about 77 percent of people enrolled in Medicare Part B also enrolled in Part D or received Medicare-subsidized drug coverage through their employer, well below CBO’s original 93 percent estimate.  Roughly 6.5 million fewer people were enrolled than CBO had estimated in 2003.

Moreover, there is strong evidence that using private plans to deliver the Medicare drug benefit has actually raised Medicare’s costs.  Before Part D existed, low-income elderly people enrolled in both Medicare and Medicaid (known as “dual eligibles”) got drug coverage through Medicaid, which requires drug manufacturers to provide large discounts for the drugs it buys.  The private insurers providing Part D drug coverage, however, are getting much smaller discounts.

Last year, the Department of Health and Human Services’ Office of Inspector General found that the discounts negotiated by private Part D plans reduced the costs of the most widely used brand-name drugs by only 19 percent; in comparison, the rebates that Medicaid requires cut costs for those drugs by 45 percent.  Requiring drug manufacturers to pay Medicaid-level rebates for drugs dispensed to low-income Medicare beneficiaries, as the Administration proposes, would reduce Part D costs by $137 billion over the next ten years, according to CBO.

Contrary to Chairman Ryan’s claims, CBO’s analysis of his previous premium support proposal found that replacing traditional Medicare with private insurance actually would raise total health care costs per beneficiary because private insurance has higher provider payments and administrative costs.