Medicare Part D Isn’t Broke So Don’t Fix it

Published June 17, 2011

Only in Washington could you get traction with a saying like, “if it ain’t broke, fix it anyway.”

But, sure enough, in his new deficit plan, President Barack Obama has proposed imposing $49 billion worth of Medicaid-style cost controls on a health care success story – the landmark 2003 Medicare Part D prescription drug program.

While deficit reduction is a worthy goal, this particular idea is not only bad; it won’t work. There’s ample evidence that it would not only increase costs, rather than reduce them, but also reduce access to life-enhancing and life-saving drugs.

In a number of independent surveys – including one from the nonpartisan Medicare Today Coalition – 90 percent of participants gave their Part D coverage strong marks. The reason the program is a success is that it harnesses the power of the market, reducing costs and increasing access by making companies compete with each other.

The Medicare Trustees reported that the average monthly premium under Part D in 2011 is just $30, far lower than the original forecast of $53. A recent analysis by the nonpartisan Congressional Budget Office indicates that the federal government cost for Part D for 2004-13 is about 46 percent lower than initial projections.

That’s simply unheard of in the history of government entitlement programs.

The reason Part D saves money is because it allows plan sponsors – private insurance companies – to negotiate prices with drug manufacturers and pharmacies. In other words, the free market works.

Medicaid, in contrast, uses government price controls, forcing drug companies to provide a huge rebate to gain access to the Medicaid population. Price controls have always led to restricted access to desired products – and higher costs.

Now, unfortunately, President Obama wants to introduce Medicaid-style rebates to Medicare Part D. The CBO has stated that introducing such rebates could increase Part D premiums as much as 20 percent. That hike would apply not only to those with traditional Medicare, but also to the 1.3 million Medicare-eligible veterans who supplement their veterans’ drug coverage through Part D, as well as 200,000 federal retirees enrolled in Part D.

The negative repercussions of the Medicaid forced-rebates aren’t confined to those in government programs. A recent CBO analysis indicated that some “private-sector purchasers [already] pay higher prices as a result of … Medicaid’s rebate program,” concluding that the cost-shifting would only increase if the rebates applied to Medicare.

Developing drugs is an expensive process. Out of every 5,000-10,000 proposed screenings, only 250 get to preclinical testing, five to human clinical trials, and one to approval by the FDA. Developing a new drug, on average, costs more than $1 billion.

Pharmaceutical companies need to recoup their R&D costs through the sales of their success stories. If government purchasers aren’t paying their share, either costs gets added on to private-sector purchasers, making prescription drug coverage more expensive for them, or drug companies decide to scale back on R&D, which means fewer life-enhancing and life-saving pharmaceuticals for everybody.

The CBO has gone so far as to say that expanding the mandatory rebates to Medicare “would reduce manufacturers’ incentives to invest in [research and development] on products that would be expected to have significant Medicare sales.” Why invest in treatments for Alzheimer’s if you can’t recoup your development costs?

Medicare reform has to be part of any serious deficit reduction plan, but price controls won’t contain costs and will do real harm to the quality of health care for all. Part D is one of those rare government programs harnessing the power of the free market instead of seeking to supplant it. It’s not broken, and Washington shouldn’t fiddle with it.

Sally C. Pipes is president, CEO and Taube Fellow in Health Care Studies at the Pacific Research Institute. Her latest book, The Top Ten Myths of American Health Care, was published in 2010. Originally published at