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Medicare Part D Spending

By May 16, 2012Commentary

In 2003 Congress added a prescription drug benefit to Medicare, doing it without using the traditional Medicare fee-for-service approach.  The benefit is provided solely through contracted private health plans.  At a high level, the program has been a great success and spending on Part D is 30% below the Congressional Budget Office projections at the time.  Those who are not fans of a private approach to Medicare have tried to undercut this basic fact ever since and a Kaiser Family Foundation report is the latest salvo in this effort.   (KFF Report)   The authors examine a number of factors which might account for the lower spending.  One clear one is that enrollment is lower than the CBO assumed, about 14% less.  But at the same time, many of the people who didn’t enroll appear to be healthier, with little drug use.  For example all 6 million dual eligibles, who are heavy drug spenders, were automatically enrolled.  So while enrollment may be 14% lower, potential spending was not nearly that much reduced by the smaller enrollment.

Among the other factors cited by the authors, such as lower overall drug spending, due in part to greater generic use and a smaller pipeline of new drugs, better manufacturer rebates and better control of drug utilization, most are likely directly impacted by Part D plan activities, although the authors give them limited or no credit for these effects.  Plans negotiated hard with manufacturers for good pricing.  The plans’ utilization management activities drove greater generic utilization and avoided inappropriate prescribing.  And the number of competing plans has been much greater than CBO and critics projected and the presence of so many plans has kept premiums, which are all Medicare pays, low.  In fact, the program could be made even more competitive.  Part D is an excellent example of how competition can still work in health care and a strong argument for privatizing the entire Medicare program, which at a minimum would save billions annually on administrative costs.

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