Research & Commentary: ‘Rebate’ Would Undermine Successful Medicare Part D Program

Published August 3, 2016

Medicare Part D has been a great success by most objective measures, but despite the program’s achievements, the Centers for Medicare and Medicaid Services (CMS) and the Obama administration have begun to call for a change in the pricing rules of the prescription drug program.

his 2017 budget, President Barack Obama proposed repealing the non-interference provisions at the core of Medicare Part D. The budget also calls for pharmaceutical companies to “rebate” up to 40 percent of their drug sales back to Medicare, making Medicare Part D more similar to its traditional Medicaid counterparts. Forcing this rebate on drug makers would force them to sell their products to insurance companies at a loss, which would in turn lead to much higher prices for all other consumers.

In June, a group of 26 free-market and tax-watchdog groups sent a letter to Congress arguing the rebate is simply another Medicare tax. “This tax will have a significant impact on the market,” the coalition wrote in the letter. “Drug companies will respond by embedding the cost of the tax in the price of their drugs, driving up the total cost of insurance. Increasing the price of insurance – due to direct government involvement – is a de facto tax increase on America’s seniors.”

This is not the first attempt by the Obama administration to reform Medicare Part D. In 2015, Obama included a proposal in his budget that would have empowered the federal government to negotiate Medicare Part D drug prices directly with pharmaceutical companies. Another set of rule-changes was proposed by CMS in 2014; they would have limited the number of Part D plans offered in a particular region, weakened the current guarantee that certain classes of medications must be fully available to patients with serious illnesses, and they would have limited the ability of health-plan providers to negotiate with pharmacies and suppliers to reduce drug costs.

Under the current Medicare Part D program, private insurance plans compete against each other for the business of senior Medicare recipients, offering different benefits, costs, and levels of coverage. Seniors choose the plan that works best for them, and the government subsidizes the premiums. This competition leads to lower prices for seniors and lower costs for taxpayers; unlike other government health care programs, Medicare Part D has cost much less than originally estimated.

In the coalition letter, the group highlights just how effective Part D has been. “Through negotiations between insurers and pharmaceutical companies, seniors can purchase drugs at lower prices, often as much as 30 percent off the sticker price of brand-name drugs. As a result, Part D has cost taxpayers 45 percent less than originally estimated in the first decade following enactment, an anomaly among government programs.”

Medicare Part D has saved billions of taxpayer dollars by replacing price controls with market discipline, and it provides medications to the neediest of Americans at a lower cost than was expected. The proposed rebate, a disguised tax, would increase costs for providers and beneficiaries, limit competition, and decrease seniors’ access to vital prescription drugs. Instead of foisting unnecessary changes on a successful program, legislators should be using the market mechanisms at the heart of Part D as a model for overall Medicare reform.

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 Medicare Part D website at

How Medicare Part D Beat the Odds – and Why Policymakers Should Care
David Kendall examines how Medicare Part D could serve as a model for future health care reform. Today, Part D is among the most popular federal programs. It has come in well under budget. It has improved the financial and physical health of millions of seniors. It is celebrated as a government success,” writes Kendall.

Medicare Part D: A Model for Future Entitlement Reform
Grace-Marie Turner of the Galen Institute examines the history of Medicare reform and Medicare Part D. Turner argues legislators should learn from Part D’s success. “Medicare can be preserved, taxpayers can be protected, and seniors can continue to have access to the treatments and medicines they need, with lower costs driven not by government price controls and micromanagement but by competition, consumer choice, and innovation,” wrote Turner.

A Decade of Success: How Competition Drives Savings in Medicare Part D
Paul Howard and Yevgeniy Feyman of the Manhattan Institute review data from the Centers for Medicare and Medicaid Services, the Congressional Budget Office, and other sources to determine which factors—market competition, patent expirations, or other national trends (including private-sector innovations such as tiered formularies and preferred networks)—explain the overestimates of Part D costs.

Competition and the Medicare Part D Program
Douglas Holtz-Eakin of the American Action Forum argues the Medicare Prescription Drug Benefit (Part D) has been an unmitigated success: “A market-based approach to further federal entitlement program [sic] offers additional opportunities for controlling taxpayer costs and generating high levels of beneficiary satisfaction.”

Part D Can Be a Model for Medicare Reform
Grace-Marie Turner of the Galen Institute examines Medicaid for potential savings. For a Congress divided over where and how best to reduce spending, tackling the issue of chronic diseases should be a national priority in the broader Medicare reform debate. The question is, how best to do it? There is one program that offers a solution, a program that has been consistently popular and under budget since its enactment: the Medicare prescription drug benefit (Part D), Turner argues.

Increasing Medicare Part D Enrollment in Medication Therapy Management Could Improve Health and Lower Costs  
Bruce Stuart, F. Ellen Loh, Pamela Roberto, and Laura M. Miller contend targeting efforts to improve medication adherence, especially among people with high health-care needs, can improve health and lower health care spending. To this end, Medicare requires insurance plans that provide prescription drug (Part D) coverage to offer specialized medication therapy management services to optimize medication use for enrollees with high drug costs, multiple chronic diseases, and multiple covered drugs.

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 care sector of the economy.

The Case for Competition in Medicare
Writing for The Heritage Foundation, James C. Capretta argues 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 that competition and consumer choice can control the growth of health care costs for Medicare beneficiaries.

Cost Shifting Debt Reduction to America’s Seniors: Medicare Part D Rebates Would Dramatically Increase Drug Premiums
Douglas Holtz-Eakin and Michael Ramlet find imposing a Medicaid-style rebate in the Medicare Part D program would likely raise monthly premiums for seniors by 20 to 40 percent.

Don’t 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
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. 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, the authors conclude: “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.”


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, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database, at

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