Policy Documents

Research & Commentary: Proposed Reforms Undermine Medicare Part D’s Success

April 30, 2013

Medicare Part D, the Medicare prescription drug benefit for low-income seniors, has been one of the few entitlement success stories since it was passed in 2003. Medicare Part D was designed to mobilize the market and use competition to provide prescription drug coverage to seniors at competitive prices.

By almost all accounts, Medicare Part D has been a great success. Under Part D, private insurance plans compete against each other for the business of senior Medicare recipients, offering different benefits, costs, and levels of coverage. The program empowers seniors to choose which plan works best for them, with taxpayers subsidizing the premiums.

The average costs to seniors for the Part D coverage came in below all predictions. In 2004 the Medicare Trustees estimated that by 2013 the average monthly cost seniors would pay for their Part D benefit would be as high as $61. In fact, the rate has not changed much since the program began. According to the Kaiser Family Foundation, the actual average monthly cost for the Part D benefit remains around $30. By contrast, premiums for Medicare Part B, which covers doctors’ visits and other outpatient care, increased from an average of $89 in 2006 to $105 in 2013, according to The Hill.

Medicare Part D has opened up prescription drug coverage for millions of seniors who may not have otherwise had any coverage. Sally Pipes of the Pacific Research Institute argues the number of newly covered seniors proves this point: Of the 27 million seniors currently enrolled in Part D, nearly 11 million did not previously have prescription drug coverage. Pipes points out in Forbes that according to KRC Research, 90 percent of its participants are satisfied with the program.

Despite the success of Part D, members of Congress have introduced legislation that would undermine the free-market reforms that made it so successful by replacing market determination of Medicare drug prices with government negotiation. Critics of S. 117, introduced by U.S. Sen. Amy Klobuchar (D–MN), say government negotiation amounts to price-fixing because any provider that does not accept the “negotiated” price will be removed from the program.

Medicare Part D is not broken. It has proven that a modern, free-market model saves taxpayer dollars by replacing price controls with market discipline and provides medications to the neediest of Americans at a lower cost than the old system. Instead of foisting unnecessary changes on an already successful program, legislators should be using the successful market mechanisms at the heart of Part D as a model for other bidding processes in Medicare.

The following articles examine Medicare Part D and the proposed changes to the competitive bidding process from various perspectives.

For more information on Medicare Part D, visit The Heartland Institute’s Web site at http://savemedicarepartd.com/.

Medicare Drugs: Why Congress Should Reject Government Price Fixing
http://heartland.org/policy-documents/medicare-drugs-why-congress-should-reject-government-price-fixing
Medicare Part D drug prices are currently set by private negotiation within a market of intense competition among drug plans. A proposal by U.S. Sen. Amy Klobuchar (D–MN) would replace that with government “negotiation.” Writing for The Heritage Foundation, Robert E. Moffitt argues the proposal would gut Medicare Part D, a program that has exceeded expectations in the breadth of nationwide health plan participation, stable and low-cost premiums for Medicare beneficiaries, and a stunning “bend in the cost curve” unique in the health sector of the economy. 

Why Are the Democrats Attacking the Only Successful Part Of Medicare?
http://news.heartland.org/newspaper-article/2013/04/12/defending-part-d-why-are-democrats-attacking-one-successful-part-medica
Sally Pipes of the Pacific Research Institute examines the Obama administration’s efforts to change Medicare Part D, arguing the “fight is less about saving Medicare money than it is about giving the federal government yet more control over our healthcare system.”

The Case for Competition in Medicare
http://heartland.org/policy-documents/case-competition-medicare
James C. Capretta argues in this Heritage Foundation article that a market-based approach to reform would harness the power of financial incentives to encourage health care consumers to choose the best, most efficient means of getting services and would reward providers for finding ways to deliver more for less. Capretta argues Medicare Part D provides strong evidence competition and consumer choice can control the growth of health care costs for Medicare beneficiaries. 

Obama’s Medicare Part D Changes Undermine Successful Program
http://news.heartland.org/newspaper-article/2013/03/18/obamas-medicare-part-d-changes-undermine-successful-program
James L. Martin of the 60 Plus Association discusses the efforts to change the Medicare Part D program and opposes the proposed price controls. Conservatives were vocal champions of Medicare Part D in last year’s national election because it has proven that free-market reforms work and can be a significant contributor in curing our healthcare and budget ills,” he writes. “The president should acknowledge the success of Part D instead of attempting to undermine it. If he truly cared about seniors and strengthening Medicare for future retirees, he would build on this model of reform and quit trying to fix the one thing in Washington that ‘ain't broke.’” 

What's Good for the VHA Is Not So Good for Medicare
http://www.managedcaremag.com/archives/0702/0702.medmgmt.html
Many advocates of negotiation in Medicare have argued that since the Veterans Health Administration has been able to negotiate lower drug prices for its members successfully, other Medicare programs like Part D should follow suit. In this article from Managed Care Magazine Martin Sipkoff explains why this is negotiation is unlikely to work for other Medicare programs. 

Cost Shifting Debt Reduction to America’s Seniors: Medicare Part D Rebates Would Dramatically Increase Drug Premiums
http://heartland.org/policy-documents/cost-shifting-debt-reduction-americas-seniors-medicare-part-d-rebates-would-dramati
Congress is considering changes to the Medicare prescription drug program, known as Part D, which created a competitive market for prescription drug plans and has proven to be a dramatic success in controlling prescription drug costs. This report by Douglas Holtz-Eakin and Michael Ramlet finds imposing a Medicaid-style rebate in the Medicare Part D program would likely raise monthly premiums for seniors by 20 to 40 percent. 

Medicare: Negotiated Drug Prices May Not Lower Costs
http://heartland.org/policy-documents/medicare-negotiated-drug-prices-may-not-lower-costs
Alain Enthoven and Kyna Fong examine the claim that allowing the government to negotiate with pharmaceutical companies will lead to lower prices than those achieved by private drug plans. Enthoven and Fong give several reasons why this is not the case. 

Don’t Sink Medicare Part D With Price Controls: A TCCRI Issue Brief
http://www.txccri.org/new-to-tccri/dont-sink-medicare-part-d-with-price-controls-a-tccri-issue-brief
The Texas Conservative Coalition Research Institute argues against the imposition of price controls on Medicare Part D: “Medicare Part D is a real rarity: a government program that works. Part D provides seniors the medicines they need and keeps costs down. Washington should use Part D’s free-market approach to modernize other entitlements, not sink Part D through the failure of price controls.” 

Tampering with Part D Will Not Solve Our Debt Crisis
http://www.aei.org/papers/health/healthcare-reform/tampering-with-part-d-will-not-solve-our-debt-crisis/
Joseph Antos and Roland (Guy) King of the American Enterprise Institute examine the possible effects of establishing a rebate to the government for low-income seniors under Medicare Part D. Antos and King note that although legislating a rebate in Part D may change who pays what amount for the drugs, it will not lower the cost of the products: “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.” 

Federal Drug Price Negotiation: Implications for Medicare Part D
http://www.law.fsu.edu/gpc2007/CongResServCRSRL33782_MedicarePrice%20Negotiation.pdf
Jim Hahn examines what it means for the federal government to “negotiate” drug prices under existing public programs, the arguments for and against such activities, and some implications for the pharmaceutical industry, Medicare beneficiaries, and others if the proposed rules are imposed on Medicare Part D. 

The Effect of Medicare Part D on Pharmaceutical Prices and Utilization
http://www.nber.org/papers/w13917
Mark Duggan and Fiona Scott Morton evaluate the effect of Medicare Part D on the price and utilization of pharmaceutical treatments. Using data on product-specific prices and quantities sold each year in the United States, their findings indicate Part D substantially lowered the average price and increased the total utilization of prescription drugs by Medicare recipients. The results further suggest the magnitude of these average effects varies across drugs, as predicted by economic theory.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News at http://news.heartland.org/health, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org

If you have any questions about this issue or the Heartland Institute Web site, contact Heartland Institute Government Relations Director John Nothdurft at jnothdurft@heartland.org or 312/377-4000.