Policy Documents

Tampering with Part D Will Not Solve Our Debt Crisis

Joseph Antos and Roland (Guy) King –
June 29, 2011

It was clear from the outset that spending reductions in Medicare would be on the table in negotiations over raising the legal limit on U.S. government borrowing. As the first meetings of Vice-President Biden’s negotiation committee were being organized, Senate Minority Leader Mitch McConnell (R-Ky.) pointed out that significant changes in Medicare would be needed as part of a “grand bargain” if a debt limit increase was to have a realistic chance of passage through a reluctant Congress.

Following the President’s lead, some Democrats—notably Rep. Henry Waxman (D-Calif.) and Senator Jay Rockefeller (D-W.Va.)—have responded with a proposal to save $112 billion over the next decade by requiring pharmaceutical manufacturers to pay a rebate on prescription drugs purchased by low-income enrollees under Medicare’s drug benefit, known as Medicare Part D. According to Rep. Waxman, the Medicare Drug Savings Act of 2011 would “[eliminate] drug manufacturer windfalls instead of hurting seniors.”

This proposal does nothing to ease our immediate debt crisis. According to the Congressional Budget Office (CBO), the rebate would generate no savings in 2012 and only $4 billion in 2013. If we want to keep the federal government operating without any significant change in outlays or revenue until after the next election, the debt limit must increase by $2.5 trillion. The Part D rebate proposal would do little to satisfy Republican demands that any increase in the debt limit be accompanied by an equal decrease in federal spending.

Although fiscal arithmetic is important, the greater concern is the persistent belief among many policymakers that they can get something for (almost) nothing. Sen. Rockefeller and Rep. Waxman are wrong to claim that mandated rebates offer savings to the federal government with no consequences for Medicare beneficiaries, and by implication, anyone other than drug company stockholders.

This view fails to recognize an important fact: changing the operation of a successful program is asking for trouble. Part D created a competitive market for Medicare prescription drug plans with strong incentives to keep costs low while offering coverage that meets the needs of an older population. A poorly-designed program would have failed if the drug plans had focused on avoiding high-risk enrollees needing more expensive prescriptions.

Instead, Part D has provided a substantial benefit to all of its enrollees at a cost well below what CBO originally estimated. That includes enrollees who qualify for a low-income subsidy (LIS)—a group that is high risk, spending about twice as much as other Part D beneficiaries. Upsetting the balance that has been achieved in Part D could result in poorer program performance and disruption for enrollees who have the lowest incomes and the poorest health.

Legislating a rebate in Part D may change who pays what amount for the drugs, but it does not lower the cost of the products. As a consequence, Part D plans may not be able to negotiate prices as low as they were before the rebate policy, necessitating increases in premiums or changes in the benefit offered by plans (for example, through more restrictive formularies or higher copayments). Higher-income enrollees could see their costs rise or benefits deteriorate as a consequence of the rebate policy. Medicare might also face higher costs because of the poorer deals negotiated by Part D plans, undercutting net savings to the government after factoring in the rebate revenue.