Competition Works for Medicare Part D

Published September 1, 2006

A study of the Medicare Prescription Drug Coverage Program, also known as Part D, reveals free-market competition is keeping drug prices down more effectively than price controls in Medicare’s other segments.

According to “Secretary’s Progress Report IV on the Medicare Prescription Drug Benefit,” by U.S. Health and Human Services Secretary Mike Leavitt, released June 14, allowing seniors to choose from a variety of coverage plans has kept costs 40 percent lower than the Bush administration expected after the president signed the Medicare Modernization Act into law in December 2003. This could save taxpayers billions of dollars over the next decade.

“[E]xperts estimated that the average [individual’s] monthly premium would be around $37,” Leavitt wrote. “Our analysis of actual enrollment finds that the average 2006 Part D premium is less than $24. This represents strong competition plus informed beneficiary choices.

“The overall 2006 cost to the taxpayer has dropped about 20 percent from the July 2005 estimate, and estimates for the net total cost to Medicare for the 10-year period from 2006 to 2015 have been cut by $180 billion,” Leavitt continued. “State phase-down contributions over the same period are now projected to be $39 billion less.”

Model Program?

Some free-market advocates believe Part D’s competitive success could lead to price controls being removed throughout the entire Medicare program in the future.

“The early evidence with the Part D program shows that competition can work in Medicare,” said Grace-Marie Turner, president of the Galen Institute, a policy research group in Alexandria, Virginia. “Drug plans competed to encourage seniors to sign up, by offering more attractive benefits and lower premium prices, and seniors responded by picking plans that offered the best value. The reason the drug plans were able to offer lower prices is that they were able to negotiate with pharmaceutical companies for lower drug prices.

“This is the market working to provide better value for beneficiaries and lower costs for taxpayers,” Turner said. “We finally can see that the health sector can respond to the forces of competition and be better for it!”

Mixed Views

Other free-market advocates were skeptical of Leavitt’s report. Twila Brase, president of the Citizens Council on Health Care in Minnesota, interpreted the findings cautiously.

“The 40-year history of Medicare shows that government programs start out with a bang, and once everyone is a captive participant, prices increase and access declines,” Brase explained. “In addition, despite the unanticipated drop in estimated cost to taxpayers, the drop is not a saving. The cost to taxpayers is still $746 billion over the next 10 years. That’s $75 billion a year taxpayers didn’t have to pay before Medicare Part D became law.”

Mike Cannon, director of health policy studies at the Cato Institute, a libertarian think tank in Washington, DC, said Leavitt’s optimism is shortsighted.

“Medicare Part D dumped more weight on an already sinking ship. Now Congress and the Bush administration are saying, ‘See, it’s not sinking that much faster.’ This is success?” Cannon asked. “What Republicans see as short-term savings will quickly disappear as seniors, drug manufacturers, and politicians learn to game the system.

“Everyone from conservative Republicans to left-wing Democrats are already lining up with legislation that would increase the cost of this program. Part D is a disaster of epic proportions,” Cannon said.

Karla Dial ([email protected]) is managing editor of Health Care News.

For more information …

The June 14, 2006 report by U.S. Health and Human Services Secretary Mike Leavitt, “Secretary’s Progress Report IV on the Medicare Prescription Drug Benefit,” is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to, click on the PolicyBot™ button, and search for document #19392.