Policy Documents

A Decade of Success: How Competition Drives Savings in Medicare Part D

Paul Howard and Yevgeniy Feyman –
December 1, 2013

On December 8, 2003, then-president George W. Bush signed into law the Medicare Modernization Act (MMA). Without a doubt, the law created the most significant overhaul of Medicare in the program’s history. As part of the MMA, a new, voluntary prescription drug program called “Medicare Part D” was enacted. Beginning in 2006, Medicare enrollees would also be able to sign up for outpatient prescription drug coverage through private insurance companies, with premiums subsidized by Medicare. To date, seniors have expressed high levels of satisfaction with the program, and Part D expenditures have been more than 40 percent lower than initial government estimates—a rarity for a government health-care program.

However, the program was controversial at the time of its launch in 2006 (and at the time of its passage). Indeed, soon after the bill became law, a plurality of seniors—some 47 percent—disapproved of the law. Nevertheless, Part D is now often touted as a rare entitlement success story, with praise from both sides of the political aisle. In 2011, then–CMS administrator Donald Berwick said that Part D was a “competitive market and we’re seeing effects of good competition among Part D plans,” as he explained to reporters why Part D premiums had actually declined that year. Former Senate majority leader Bill Frist pointed out that “[s]eniors, taxpayers and private industry all found a way to make [Part D] work,” and Karen Ignagni, CEO of America’s Health Insurance Plans, noted that Part D is one of the few successful public-private partnerships operating at a national level.

The root cause of Part D’s success remains hotly disputed. Part D proponents attribute the law’s success to competition driven by the use of private plans, competition, and private-sector cost-saving innovations.

Critics attribute Part D’s lower-than-expected costs to external factors unrelated to the program’s design. They argue that lower-than-predicted overall costs are a result of lower-than-predicted enrollment as well as a general slowdown in national drug spending, primarily due to a wave of patent expirations and other national trends unrelated to plan designs.

In this report, we review data from the Centers for Medicare and Medicaid Services, the Congressional Budget Office, and other sources, to examine which factors—market competition, patent expirations, or other national trends (including private-sector innovations such as tiered formularies and preferred networks)—explain overestimates for Part D costs.