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Competition and Part D

By February 13, 2015Commentary

Not completely wholeheartedly, and largely to satisfy conservatives, CMS has utilized a somewhat competitive bidding process for the Medicare Advantage and Part D program.  It appears that one result in regard to Part D has been drug spending below original projections.  The Congressional Budget Office takes a look at the effects of competition on that part of Medicare.   (CBO Working Paper) (CBO Comp. Paper)   The financial success of Part D is indisputable:  spending in 50% lower in 2013 than the CBO originally projected in 2003 and 40% less than CMS itself projected.  Part of this difference is attributable to lower enrollment.  Beneficiaries have to proactively enroll in Part D and 12% fewer did so than CBO projected.  This is probably due to the fact that there are number of beneficiaries who have very low drug use and for whom the program does not make economic sense.  And a big chunk of the decline is due to the rapid growth of generic drug prescribing, which went from 67% to 78% nationally between 2007 and 2010 and from 63% to 73% in Part D.  Generic rates have risen even further since 2010.  National drug spending growth per person slowed to an average of 2% in this time period, a dramatic deceleration from earlier years, and Part D spending showed the same result.  But the competitive framework under which Part D plans must submit bids and the government reimburses on a formula related to the lowest bid, allowed CMS to capture the benefit of these lower drug spending trends.  The CBO’s analysis found that the competitive framework was definitely a factor in the lower spending.

Part of the CBO’s work is actually reflected in a working paper which looked specifically at the effect of the number of competitors in a Part D region on bids.  Most Part D regions had 16-22 different plan sponsors offering coverage.  That working paper, consistent with general economic theory, found that having more competitors in a region did lower bids, resulting in lower spending by the Medicare program.  More precisely, for each additional sponsor entering an 18 firm market was associated with a reduction in bids of about .4%.  You can imagine that a 16 competitor market is already pretty competitive and much of the effect of competition probably occurs at a smaller number of competitors.  In any event, it is fairly clear that competition can work to reduce prices, while keeping benefits rich.  CBO suggests a couple of instances where CMS might be able to further enhance competitive dynamics, particularly in the portion of Part D relating to low-income beneficiaries.  It seems that a purely competitive model, where CMS reimburses plans solely on the basis of the low bid, would likely result in the lowest level of spending.

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