Medicare’s Private Option
It points to the broader health-care solution: the market.


James C. Capretta

The other competitive component of Medicare is the drug benefit — which is actually a prototype of a full-fledged premium-support plan. The government’s contribution toward drug coverage is determined entirely by competitive bids from plans offering prescription-drug insurance. The government calculates the enrollment-weighted average of those bids and provides a percentage of that amount to the beneficiaries as their entitlement to drug coverage. The beneficiaries then apply this payment to the plan of their choice, and pay any additional premium themselves. This design, which is exactly what Paul Ryan envisions for the rest of Medicare, ensures that the beneficiaries are cost-conscious and eager to enroll in low-premium, high-value plans.

By every measure, and especially by the standard of restraining cost growth, the drug benefit has been a success. In 2014, for the fourth year in a row, premiums owed by enrollees in prescription-drug plans have remained flat, at about $31 per month, on average. This is four dollars below the premium that the Congressional Budget Office predicted at enactment (in 2003) would be required in 2006. Total costs for the program are more than 40 percent below the original estimates. And the CBO has also concluded that the drug benefit has improved the health of seniors, thus lowering costs in the rest of Medicare. It is very rare indeed to find a new federal program that comes in under budget and yet surpasses expectations for customer satisfaction and quality.

The Obama administration regularly sends out officials to downplay these achievements. It has also dreamt up supposed problems in the program — such as too many plan offerings, and the use of preferred pharmacies — in an attempt to justify a massive and costly 700-page regulation, issued as a proposed rule in January. If adopted, the regulation would severely limit the cost-cutting strategies of the drug plans, require them to contract with essentially all pharmacies in a community, and give the government the authority to stick its nose into drug-pricing negotiations. The effect would be a massive increase in the program’s costs in 2015 — as much as $1.6 billion more than what they would be under current rules. The result would be higher premiums for seniors, and reduced choice. This is the quintessential bloated, bureaucratic solution in search of an actual real-world problem.

As with the proposed Medicare Advantage cuts, Republicans in Congress have pounced on this clumsy overreach of the administration — and they will have a lot of allies in the coming fight. Patient advocates have recognized that heavy regulation of a benefit that is working will only impede access to care for those with difficult and costly medical conditions. The GOP would be wise to highlight the problems these higher costs would cause for very vulnerable and frail seniors.

President Obama long ago signaled his disdain for the belief that competition and market forces could work to improve the nation’s health-care system. Unfortunately for him, private plans and a prototype for true competition already had a foothold in Medicare before he took office. They were working well, and seniors liked what these arrangements provided for them. The administration’s efforts to roll back these popular features of Medicare are thus setting in motion a major political backlash among elderly voters. The GOP need only channel it to good use in November.

— James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.


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