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Misleading Claim About Medicare Part D Relies on Faulty Arithmetic

“Medicare Part D Proves That Competition Lowers Health Care Spending,” a recent Heritage Foundation blog post claims.  But a key figure that it cites as evidence is wholly incorrect.

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 and others argue that these lower costs support his proposal to convert Medicare into a “premium support” system, in which beneficiaries would receive a voucher to buy private coverage or traditional Medicare.

But, as our analysis and a recent Kaiser Family Foundation report show, private insurers have had little or nothing to do with Part D’s lower-than-expected spending.  According to our analysis:

  • Under both the trustees’ and CBO’s estimates, more than half of the lower Part D costs for the drug benefit’s first five years (2006-2010) came from lower-than-expected enrollment.
  • The rest of the savings came from lower per-beneficiary costs, which in turn reflected a slowdown in per-capita prescription drug spending throughout the U.S. health care system as patents for costly drugs expired, fewer blockbuster drugs came to market, and use of generic drugs rose.

Trying to downplay these findings, Heritage cites a 2011 op-ed claiming that lower-than-expected enrollment accounts for only 17 percent of Part D’s lower costs.  That figure is based on the op-ed’s rough calculation that enrollment accounted for $92 billion in lower Part D costs between 2006 and 2013.

But the difference between CBO’s current estimate of net Part D costs through 2013 ($363 billion, after subtracting payments that Medicare receives from beneficiaries and states) and its original estimate ($550 billion) is only $187 billion.  And $92 billion is about half of $187 billion, not 17 percent of it.