Lower-Than-Expected Medicare Drug Costs Reflect Decline in Overall Drug Spending and Lower Enrollment, Not Private Plans

Some supporters of the House budget plan’s proposal to replace Medicare with a voucher to purchase private health insurance claim that reliance on private insurers can lower costs.^[1]  They cite the fact that the costs of Medicare Part D, which took effect in 2006, have been lower than the Congressional Budget Office predicted when Congress enacted the drug benefit.^[2]  They attribute this lower spending to efficiencies produced by competition among the private insurers that deliver the benefit.

This claim does not withstand scrutiny.  The two primary factors driving the reduction in Medicare Part D spending were: 

• The sharp decline in growth in spending for prescription drugs throughout the U.S. health care system.   In the late 1990s and early 2000s, prescription drug spending grew rapidly, reflecting the availability of new “blockbuster” drugs, rising prices for existing drugs, and greater utilization by beneficiaries. ^[3]  Drug spending growth began to moderate unexpectedly and then slowed more significantly around the time the Medicare prescription drug benefit took effect in 2006.  But this was not caused by enactment of the drug legislation, as is evidenced by the fact that growth in spending on pharmaceuticals slowed throughout the health care system.  This slowing of expenditure growth was the result of other developments, including some major drugs going off-patent, fewer new blockbuster drugs coming to market, and much greater usage of lower-cost generic drugs. ^[4]  Indeed, overall U.S. prescription drug spending was about 35 percent lower in 2010 than had been projected back in 2003. ^[5]  As the Medicare Trustees noted in their recent annual reports, these system-wide drug cost trends have been key factors in reducing Medicare Part D spending below the levels projected when the Medicare drug benefit was enacted.^[6]
• Lower-than-expected enrollment in Medicare Part D.  On average, about 93 percent of Medicare Part B beneficiaries were expected to enroll in the Medicare drug benefit (or receive employer-sponsored retiree drug coverage subsidized by Medicare) during its first eight years. ^[7]  CBO now estimates, however, that only about 77 percent of Part B beneficiaries enrolled in Part D or subsidized retiree coverage in 2010. ^[8]  That means roughly 6.5 million fewer beneficiaries were enrolled in Medicare Part D last year than originally projected, causing costs to be substantially lower than CBO originally assumed.        

Moreover, there is evidence that, far from reducing costs, the use of private plans to deliver the Medicare drug benefit has increased costs.  Prior to the creation of Medicare Part D, Medicaid provided prescription drug coverage to “dual eligibles” — the low-income beneficiaries enrolled in both Medicare and Medicaid.  Then, starting in 2006, Medicare took over drug coverage for the dual eligibles.  When Congress enacted the Medicare drug benefit, it assumed that the private insurance companies that would participate in Medicare Part D would be able to negotiate larger discounts from drug manufacturers than those required under Medicaid.  In fact, however, research shows that the private insurers offering Part D coverage are getting significantly smaller discounts for drugs than the rebates that manufacturers are required to provide state Medicaid programs. ^[9]  One estimate found that drug prices, net of discounts, under Part D to be at least 20 percent higher than the estimated net prices that Medicaid pays. ^[10]  

As a result, the federal government is incurring considerably higher drug costs for the dual eligible beneficiaries than were previously paid under Medicaid.  According to CBO, requiring drug manufacturers to pay Medicaid-level rebates (or discounts) for drugs dispensed to the Medicare beneficiaries who receive Medicare’s “low-income subsidy” to help them afford the premiums for Medicare drug coverage (most of whom are dual eligibles) would reduce Medicare Part D costs by $112 billion over the next ten years. ^[11]  This is strong evidence that reliance on private insurance, has raised, rather than lowered, the government’s costs.

Furthermore, Medicare beneficiaries have long had the option of enrolling in private insurance through the Medicare Advantage program (and its predecessors) rather than in traditional Medicare, on the theory that private insurers could deliver higher-quality care at lower cost.  Yet experience shows that private plans have cost substantially more than in traditional Medicare, with little evidence they furnish better care. ^[12]  For example, according to the Medicare Payment Advisory Commission, in 2011 Medicare will pay, on average, 10 percent more for beneficiaries enrolled in private insurance than for comparable beneficiaries enrolled in traditional Medicare.^[13]  (The Affordable Care Act will begin to curb these overpayments starting in 2012.) ^[14]

Finally, CBO’s analysis of the budget plan that the House of Representatives approved on April 15 found that in 2022, when the budget plan would convert Medicare into a voucher program for newly eligible seniors, the cost of a private insurance plan providing comparable benefits would be almost 40 percent higher than the cost of traditional Medicare.  That is because private plans have higher administrative costs (including profits) and pay higher provider reimbursement rates. 

Not only would a private plan be more costly overall, but beneficiaries would end up paying far higher out-of-pocket expenses.  CBO found that in 2022, typical beneficiaries turning 65 that year would pay more than twice what they would have paid under regular Medicare — $12,500 rather than $6,150. ^[15]  CBO also reported that the degree to which seniors would pay more out of pocket under the House budget plan would increase over time as the value of the voucher steadily eroded relative to the cost of private insurance.