Debunking the Myth of Private Insurers and Medicare Part D

Columnist Robert Samuelson says the Congressional Budget Office may be wrong in estimating that the House-passed plan to convert Medicare into a voucher to buy private insurance would raise total health costs per beneficiary by upwards of 40 percent.  Samuelson, however, may be drawing the wrong conclusion from Medicare’s experience with its “Part D” drug benefit.

Samuelson notes that the Part D drug benefit — which private insurers provide — has cost much less than CBO originally expected.  House Budget Committee Chairman Paul Ryan, who authored the House-passed plan, cites the lower Part D spending as justification for his new proposal and attributes the lower-than-anticipated costs to efficiencies produced by competition among private insurers.

But as our recent analysis explains, the reliance on private plans had little or nothing to do with Part D’s lower-than-expected costs.  The primary factors were:

• Prescription drug spending throughout the entire U.S. health care system fell sharply just as Part D got up and running.  That’s because fewer new blockbuster drugs came to market, some major drugs went off-patent, and patients relied more on 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.  The Medicare trustees have explained that this system-wide slowdown was a key factor in reducing Medicare drug spending below original projections.
• Part D enrollment was significantly lower than expected.  In 2010, only about 77 percent of Part B beneficiaries were enrolled in Part D or received Medicare-subsidized drug coverage through their employer, well below CBO’s original 93 percent estimate.  That means roughly 6.5 million fewer people were enrolled than CBO had estimated in 2003.

Moreover, there is strong evidence that the use of private plans to deliver the Medicare drug benefit may actually have raised Medicare’s costs.  Before Part D existed, low-income elderly people who enrolled in both Medicare and Medicaid (known as “dual eligibles”) obtained drug coverage through Medicaid, which uses its buying power to require drug manufacturers to provide significant discounts for the drugs it buys.  When Congress created Part D, it assumed that the private insurers participating in the new program would be able to negotiate larger discounts than Medicaid receives.  Instead, the opposite happened: the private insurers are getting much smaller discounts.  CBO estimates that requiring drug manufacturers to pay Medicaid-level rebates for drugs dispensed to low-income Medicare beneficiaries, mostly dual eligibles, would reduce Part D costs by $112 billion over the next ten years.

This is further evidence that any efficiencies that private insurers may secure are likely to be substantially outweighed by the loss of savings from the lower administrative costs and greater market leverage that Medicare and Medicaid have.  This aspect of the Part D experience supports, rather than conflicts with, CBO’s judgment that the Ryan Medicare plan would substantially increase per-beneficiary costs.