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Part D's Lessons for Entitlement Reform

December 17, 2013

By Paul Howard

While battles rage over Obamacare, Washington barely noticed the anniversary for another government health care program. December 8 marked ten years since passage of the Medicare Part D drug program for seniors.

In contrast to public outcry over botched Obamacare plan design, silence over Part D is a sign of its success, and it proves markets can provide competitive, affordable health care benefits to seniors (including poor seniors) and save taxpayers hundreds of billions of dollars along the way. Part D’s success provides a model for reforming other entitlement programs like traditional Medicare.

Liberal skeptics argue that while Part D may have come in more than 40 percent under budget, the program’s competitive market design does not drive its success. Instead, they attribute Part D’s success to broader market trends, primarily drug patent expirations. In a new study we published, however, we found that while patent expirations (along with other market trends) undoubtedly did help the program succeed, Part D’s competitive design is a big factor in its success.

Private plans receive subsidies from the government and premiums from enrollees to cover seniors under Part D. Overall, there’s a roughly 75/25 split between subsidies and premiums, with higher income seniors paying a bit more and very poor seniors getting free or nearly free drug coverage. At the time of its passage, Part D faced some skepticism from both sides of the aisle. Conservatives worried about costs (originally estimated at more than $700 billion over ten years), while liberals doubted a privately run program would deliver quality coverage. An early concern about the program was that no companies would play in the market, and Part D included a “fallback” public option if at least two plans weren’t available in every region.

Today, eight years since its rollout, those concerns have largely evaporated. Part D garners high satisfaction from beneficiaries and has significantly increased the share of Medicare enrollees with prescription drug coverage. Amidst seemingly never-ending budget battles and mandatory entitlement spending that eats up ever more of the federal budget, Part D’s success story should guide lawmakers in addressing the nation’s entitlement woes.

Private plans quickly embraced Part D, with more than 1,500 plans debuting in 2006. In 2014, although there has been some market retrenchment (less popular plans exited the program, and insurers are learning which designs are most effective) there will still be more than 1,000 different plans competing for Medicare enrollees, with the typical enrollee able to choose from more than 30 different plans, with an average premium of around $30. Some plans are free.

In the above-mentioned study, by comparing per-capita prescription drug spending trends nationally and in Part D, we controlled for trends affecting both markets – including patent expirations, drug utilization, tiered formularies, and just about any other factor that would be captured in national health expenditures data.

We discovered that national trends only explained a bit over half of Part D’s underestimated costs – 56 percent. Nearly half, 44 percent, of Part D’s cost savings, are unexplained by national trends. Part D diverged from national trends in other way too. Between 2006 and -2010, drug prices in Part D (accounting for generic substitution) grew only 2 percent in total, while the cost of drugs in the commercial market (including generics, branded, specialty, and non-specialty drugs) grew by nearly 25 percent.

Of course, we can’t say that competition or the use of private plans caused better-than-expected Part D results. Nevertheless, our results clearly contradict the thesis that Part D entirely piggy-backed on the national market.

But we also shouldn’t just “explain away” the effects of national trends. The point of using private plans to administer Part D is to allow them to leverage the same techniques that hold down costs in the private market. The emergence of preferred pharmacy networks in Part D, the use of multiple drug tiers, and aggressive generic substitution (by waiving co-pays, for instance) are all signs that the program is rapidly importing good ideas from the private sector (and sometimes even more aggressively). Far from being a mark against the program, Part D’s mirroring of broader, cost-saving market strategies shows it is working exactly as its framers hoped it would.

So what lessons does Part D hold for reforming entitlement programs?

Reforming Medicare is a hot button issue for both parties. Taking politics out of the equation – and allowing seniors to vote with their feet for private plans that offer effective drug coverage – has allowed innovation to thrive, offering high quality drug coverage.

Part D’s system competitive bidding system serves as a template for traditional Medicare. Transitioning to a competitive bidding program and requiring traditional Medicare to compete with private plans on a head-to-head basis would drive significant savings (as much as $275 billion over 10 years), while offering high quality coverage to seniors.

Part D shows that reforms based on an existing, successful program can save taxpayer money, drive efficiency through private-sector innovations, and deliver better value to beneficiaries of government programs. President Obama says he’s open to ideas for improving the health care system, and there’s one right in front of him: Medicare Part D.

Original Source: http://thehill.com/blogs/congress-blog/healthcare/193301-part-ds-lessons-for-entitlement-reform

 

 
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