Competition and Part D

Medicare’s Part D drug coverage was set up to be provided solely by private plans which “bid” for enrollee membership.  This creates a level of competition which it was believed would help reduce costs.  It is not, however, a system of perfect competition in which bids are purely compared to each other.  A Congressional Budget Office Presentation looked at how the system appears to affect bids.   (CBO Presentation)   Looking at the fee-for-service Medicare population, about 60% of beneficiaries chose a plan that was priced within $6 of the lowest premium plan.  There is a tendency to switch plans if the premium of the current plan rises relative to other premiums and about 12% of existing beneficiaries select a new plan each year.  Market concentration seems to play a role in bids and premiums, as regions with more sponsors do have lower premiums.  The researcher looked at multi-region sponsors and compared their bids in regions with varying numbers of total sponsors and over several years.  It appears that for each additional plan sponsor in a region, bids decrease about a half-percent.  Since many regions have as many as 15 or more sponsors, this is not an insignificant effect and directly reduces the out-of-pocket spending for beneficiaries.  Competition could be even more intense if the benchmark was eliminated, complete freedom was given on formulary decisions, the catastrophic coverage was based on estimated, not actual, costs and the low-income subsidy enrollment process was revised.  But generally the competitive nature of Part D has kept costs well-below those originally estimated for the program, which should be a lesson for the basic Medicare program.