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Lower Drug Costs Don’t Support Ryan Medicare Proposal

May 15, 2012 at 9:56 AM

We’ve updated and expanded our 2011 analysis of why the Medicare Part D drug benefit, which private insurers deliver, has cost much less than the Medicare trustees and the Congressional Budget Office (CBO) originally expected.

House Budget Committee Chairman Paul Ryan says the lower spending reflects efficiencies produced by competition among insurers, and he says that this supports his proposal to convert Medicare into a “premium support” system, in which beneficiaries would receive a voucher to buy private coverage or traditional Medicare.  We found, however, that reliance on private plans had little or nothing to do with Part D’s lower-than-expected spending.  That’s consistent with the results of a new Kaiser Family Foundation study.

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More than half of the lower Part D costs resulted from lower-than-expected enrollment.  The rest came from lower per-beneficiary costs (see graph), but that reflected a slowdown in per-capita prescription spending throughout the U.S. health care system.

Private plans actually increased Part D costs by doing a comparatively poor job of negotiating discounts from drug manufacturers. When Congress created Part D, it assumed that private insurers would negotiate larger discounts than the ones Medicaid requires for the drugs it buys, but the opposite happened.  CBO estimates that requiring private plans to get the same discounts that Medicaid gets for the same drugs would reduce Part D costs by $137 billion over the next ten years.

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