Medicare Rx Costs Below Estimates, Thanks to Private-Sector Competition

Published May 1, 2006

Debate raged last year over the expected cost of the new Part D Medicare prescription drug benefit. Now that dueling economic models have been replaced by actual experience, results are in and the news is better than expected.

The average beneficiary premium is $25 per month, down from an estimate of $37 in 2005, a drop of nearly one-third, according to a February 2 report from the Centers for Medicare & Medicaid Services (CMS).

Some on Capitol Hill, doubting the power of the market, had called for government price controls and mandated plan designs. Especially in the beginning of the debate, opponents of the proposed market-based approach argued the private insurance industry would not participate in offering these programs. Supporters of the plan said the use of competition and market forces would create better products, lower prices, and greater choices for consumers and business, as these are what work in everyday life across America.

Lower Costs

The CMS, the federal agency responsible for implementation of the new prescription drug benefit, took the lead in a new market-based approach by requiring insurance carriers to bid aggressively in order to participate in the program. The agency’s administrator, former Food and Drug Administration commissioner Dr. Mark McClellan, held fast to his belief that traditional “Washington-think” was wrong, maintaining instead that beneficiaries would drive change by selecting programs that were competitively priced and matched their needs.

Today, Medicare beneficiaries have more choices at lower premiums than anyone expected when the program implementation process began. And nothing has been compromised in achieving these savings: All plans must meet strict CMS design and access standards.

With lower costs for beneficiaries of the plan, the federal subsidy behind the program is also lower. The original estimate of the government’s per-beneficiary subsidy had been projected at $109 per month, but actual results show a per-beneficiary subsidy of $87 per month. The competitive forces of a free market have resulted in a 2006 government subsidy that is 20 percent less than predicted just one year ago.

Untold Story

In total dollars, the actual 2006 subsidy from the federal treasury will be $30.5 billion, down from the 2005 estimate of $38.1 billion. With lower actual costs for 2006 and a competitive program firmly in place, the projected costs for the program’s first decade, 2006-2015, are now $130 billion less than originally estimated. This, in turn, directly lowers the federal budget deficit, helping put the nation on a corrected course toward a balanced budget.

This will probably not be a big story on the evening news. Projected, expected bad news gets far more attention than actual, tangible, good results. Consequently, while the increased estimated costs got headlines, the dramatic efficiencies will probably not.

Skeptics continue to doubt the results. Some opine that the carriers are simply using a low first-year premium to increase enrollment. CMS actuaries, however, have reviewed the insurance carrier premiums and concluded the lower costs and savings will be sustainable into future years.

Promising Changes

This experience should send a strong message calling for new thinking about how to lower budget deficits and create a balanced budget. The now proven approach is to support the creation of a twenty-first century, intelligent health system where market forces are allowed to create better products and offer greater consumer choices at lower costs.

There are other areas ripe for this new approach. For example, if the increasingly popular health savings accounts (HSAs) were given greater legal flexibility, a reduction in health care cost trends of 2 to 4 percent or more would be possible, some analysts have estimated. Additionally, this reform could generate anywhere from $20 billion to $80 billion in additional federal revenue and dramatically reduce the number of uninsured.

Already, more than 40 percent of HSAs sold are to individuals who were previously uninsured. A bill before Congress, the Health Care Choice Act (H.R. 2355), which has been pending for more than two years, would create a more competitive individual health insurance market by allowing insurers to cross state lines to sell health policies, instead of limiting consumers to the policies approved by their home states’ insurance commissioners, as is done now. The Congressional Budget Office estimates the Health Care Choice Act would increase federal revenues by $12.6 billion between 2007 and 2015 by lowering the cost of insurance and increasing take-home pay.

Creative thinking and smart, market-based actions can generate even more promising changes. To achieve better quality and cost-effectiveness requires congressional actions and state reforms that support a market-based overhaul of the health care market. And it will take forward-thinking government officials like Mark McClellan, who has not only an insight shaped by his medical background and doctorate in economics, but also the courage of his convictions.

Ronald E. Bachman ([email protected]) is a senior fellow at the Georgia Public Policy Foundation and a senior fellow at the Center for Health Transformation, an organization founded by former U.S. House Speaker Newt Gingrich.

For more information …

The full text of the Health Care Choice Act of 2005 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 #18850.