Medicare Part D Costs $136B Less than Estimated

Published April 1, 2007

A report released by the Congressional Budget Office (CBO) on January 24 reveals Medicare Part D costs are substantially lower than federal officials estimated they would be, thanks in part to free-market forces at work in the plan.

According to the report, “The Budget and Economic Outlook: Fiscal Years 2008 to 2017,” between 2007 and 2013 Part D will cost 26 percent less than expected–about $136 billion less over the period.

That’s because “Medicare’s payments for prescription drugs under Part D are largely based on competitive bids that drug plans submit to provide coverage,” the report’s authors write. “The bids submitted for calendar year 2007 are much lower than expected–about 15 percent below the per-capita costs of providing drug coverage.

“In addition, recent information from the Department of Health and Human Services’ Centers for Medicare and Medicaid Services indicates that a larger-than-expected number of the Medicare beneficiaries who are not enrolled in Part D have some other form of drug coverage that is comparable to Part D,” the authors continue. “Because CBO expects that many of those beneficiaries will retain their existing coverage rather than enroll in Part D, it has lowered its estimate of the ultimate participation rate from 87 percent to 78 percent of Medicare beneficiaries.”

Lower Costs

Overall, said Grace-Marie Turner, president of the Galen Institute in Virginia, Part D costs are 40 percent lower than expected.

“Premiums for the drug basic benefit have fallen to an average of $22 a month for seniors this year” rather than the projected $37 per month, Turner explained. “The drug benefit was created on a new model that brings private competition into play to offer seniors lower prices and greater choice. That is far better than a government-controlled system.

“Medicare Part D is succeeding beyond expectations in terms of beneficiary satisfaction and costs,” Turner continued. “Congress should build on this success and use it as a model to reshape other public programs around competition and choice.”

The American Association of Retired Persons (AARP), a Washington, DC-based lobbying group, offers one of the most generous Part D drug benefit plans in the nation to its 35 million members. Spokesman Drew Nannis said the group would like to see the CBO report used to influence Congress to do something free-market advocates decry: negotiate drug prices.

Vested Interest

“From our perspective, that’s the free-market at its best–buying in bulk,” Nannis said. “I think you’re seeing multiple organizations bargaining [drug prices] on behalf of small pockets of Medicare beneficiaries. There are discount savings occurring. But if you purchased on behalf of 43 million recipients, that would be even greater.”

Dr. John Dunn, a member of the science and policy advisory board at the American Council on Science and Health, said AARP has a vested interest in getting the federal government to negotiate drug prices.

“The dirty little secret is that AARP decided they would offer [to cover many expensive drugs in their Part D plan.] That has to do with their general political position–they haven’t seen a government program yet that they didn’t like,” Dunn said. “So they would love to have the government involved in price controls and formulary controls.

“That eliminates what could be a future problem with the financial viability of their Part D insurance program,” Dunn continued. “They want the pharmaceutical companies to be pressured to either accept the price controls or be lost from the formulary, so they don’t have to worry about a future of expensive new drugs that could break the bank in their program, or result in the formulary being reduced in a way that causes their constituency to be upset with them.”

Doughnut Hole

Since the drug program’s inception last year, critics have found much fault with the “doughnut hole”–a gap in Part D drug coverage that leaves seniors responsible for the full cost of their medications after they and their respective insurance plans have paid $2,400 in a calendar year, until such time as the drug expenses reach $3,600. After $3,600, Medicare covers expenses again.

Nannis said the gap is a flaw in Part D that needs to be closed immediately. But according to the CBO report and free-market analysts, it’s actually one reason costs are lower than expected: It encourages some seniors to remain with private insurance plans rather than depend on the government.

“There’s no question everyone was concerned, and should have been, that this would be a very expensive proposition, but to put the doughnut hole in there took a lot of imagination,” Dunn said. “[The government] is trying to find a way to address the medications for the vast majority of people, and most won’t spend more than $2,000 in a year for them. It’s essentially a way of saying, ‘If you’ve survived the doughnut hole, congratulations!'”

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

For more information …

“The Budget and Economic Outlook: Fiscal Years 2008 to 2017,” Congressional Budget Office, January 2007,