At the time of its enactment in 2003, the Medicare drug benefit — known as Medicare Part D — had many critics. Some said the program, which is built on consumer choice and vigorous competition among private plans, wouldn’t work, because the private plans would decline to participate without a guaranteed share of the market. Others said the beneficiaries wouldn’t sign up for the voluntary benefit, because the competitive structure would be too complex to navigate. Still others said the program would explode in costs without government-imposed price controls.
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All these predictions were dead wrong. The program is now in its sixth year of operation, and it has exceeded all expectations. Some 90 percent of Medicare participants are now in secure drug coverage of some sort, and public-opinion surveys continue to show that seniors are very satisfied with the new program. Most important, the drug benefit’s costs for the first decade are coming in 42 percent below what was predicted at the time of enactment.
As this evidence of success has piled up, the critics largely and wisely went silent, realizing they had little ground to stand on.
But that began to change when Rep. Paul Ryan proposed a broader reform of Medicare that is modeled on the Part D success story. Now the critics have little choice but to try to discredit Part D lest they lose the battle over the future of Medicare. And so the attacks have resumed.
The only problem is that the critics’ arguments still have no basis in fact.
Take the latest attack from Washington Post blogger Ezra Klein. He recently argued: (a) that spending on prescription drugs throughout the health-care system (that is, not just in Medicare) is also far below previous expectations, which proves that Part D’s market-based design had nothing to do with costs’ coming in under budget; (b) that, regardless of what has happened to date, future Part D spending is expected to rise rapidly, thus undermining claims of cost discipline; and (c) that Part D premiums are 57 percent higher in 2011 than in 2006.
Unfortunately for Klein, each of these criticisms is easily dismissed.
Let’s start with the drop in projected drug spending systemwide. In early 2004, the actuaries at the Centers for Medicare & Medicaid Services (CMS) issued national health-expenditure projections indicating that total retail prescription-drug spending for the ensuing decade would reach about $3.5 trillion. In early 2010, the actuaries released new projections estimating drug spending for the same ten-year period at about $2.4 trillion, or 31 percent below the previous projection. But these projections include prescription-drug spending for both the elderly and the non-elderly. What would the numbers look like if the drop in drug spending for the elderly (about one-third of all spending) were removed from the estimates? When that is done, the drop in projected spending for everyone else is shown to be less pronounced — just about 27 percent. So, despite the impression that Klein tries to leave, the fall in projected spending for the elderly exceeds the fall in spending for the rest of the population.
Moreover, there’s a real question about what precipitated the fall in projected spending systemwide in the first place. Obamacare apologists are constantly arguing that changes in Medicare have the potential to influence the entire health-care market. Well, if that’s the case, it would apply to Part D as well. For instance, Part D plans have aggressively pushed generic substitution as a way to lower premiums — and they have had considerable success. Isn’t it likely that this trend among the elderly has influenced how physicians and pharmacists behave with all their patients?
In sum, the drop in drug spending systemwide is not evidence of Part D’s irrelevance. Indeed, it reinforces the point that Part D has been effective.
Next, Klein cites estimates from the CMS actuaries to argue that, even if Part D cost escalation has been moderate in the past, it is set to rise sharply in the future. But he fails to mention that a main reason for projected cost growth going forward is that Obamacare expanded the drug benefit by closing the so-called “doughnut hole.” Moreover, the actuaries have noted that these projections come with great uncertainty. What we do know with certainty is that costs in the program’s first five years have come in remarkably low.
Finally, Klein argues that Medicare beneficiaries are paying premiums in 2011 that are 57 percent higher than they were in 2006. This is demonstrably false. The data Klein cites are based on a subset of the program — the stand-alone drug plans — which means Medicare Advantage enrollees and those with employer-sponsored drug coverage are excluded from the calculation. Moreover, it assumes that seniors in 2011 will remain in the same plans they were in in 2010. But the whole point of Part D’s consumer-choice structure is that it allows enrollees to migrate out of plans with high costs to those with lower costs. And, not surprisingly, that has happened every year of the program’s operation. The actual premiums paid by enrollees in 2011 are expected to be well below those cited by Klein.
The truth that Klein and others seem unwilling to face is that, on an “all in” basis, Part D has been a phenomenal success story, as shown in the graph below. From 2006 to 2010, per capita Part D costs across all settings have risen by an average of just 1.2 percent annually, which is well below the per capita rise in costs for the rest of Medicare.
The key to the drug benefit’s early success is engaged consumers. Seniors want to get the best value for their Part D premium, and that means looking for low-premium plans with good coverage for the drugs they need. The result has been a record of cost control that has never been matched by government micromanagement — and never will be.
— James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director at the Office of Management and Budget from 2001 to 2004.
I've worked in pharma sales for almost 10 years and Part D was inacted in my second year. I supported it not because of my industry, but because it provided what Milton Friedman promoted and that was the "Freedom to Choose". The Wal-Mart $4 drug list had a huge impact and that is another example of 'market forces' finding a better solution for themselves and their customers. If Leviathan would recede, seniors could see even more savings. Here's one example. Pharma companies offer "pharmacy discount cards" to commercial patients that reduce most drugs to $25, $10 and even $0. Unfortunately the federal gov't bans Medicare participants, even eligible non-participants from using these cards/programs. Remove this restriction and see seniors' medication costs drop even more. It's the market stupid. Also, thanks for this article. I've been looking for some ammo against some of my friends that lambast Part D. I want as little gov't as possible in our lives and want Medicare as a whole reformed. Part D is a great example of how Medicare can be made better, since it is not going away. Lastly, was there any data on how much was saved in hopital/critical care costs with patients getting the medications they need to treat their conditions? Would love to see that. Heard several years ago that it had reduced those cost dramtically.
The reason you can't use that card is that that George W Bush and the republicans banned the federal government from negotiating prices for drugs with government money. Basically, government funds must pay 'retail' which is what the companies charge. So you cannot use a card from a company that has negotiated a lower than retail rate.
If the government, as the largest purchaser of drugs, were able to negotiate on equal footing as the much small private insurers, the cost of said drugs would be much lower for Medicare/medicaid than Part D.
Sure, hit the liberals for not pursuing the efficiencies of the market, but don't forget to smack the right for the same transgressions.
Can someone explain why Ezra Klein gets so much play for others in the media? It seems as if many of his lefty positions are relatively easy to debunked by our side.
As a Part D participant with a lengthy history in benefits, I am totally satisfied with the program. My wife and I spend about $7K per year total on drugs for our conditions including Rx copayments. Part D allows us to select separate programs which help to manage our costs.
We are much more aware of our Rx costs than ever before and are allowed to make the choices we feel best for us. The medigap insurance chouces also allow us to manage those costs. A system based upon choice in the private sector will work the same. It must include an option for Medical Savings Accounts to complete the choices.
I have worked in employee benefits for over 25 years and have been on a Voluntary Employee Benefit Association (VEBA)as a Director in retirement. This, along with a chronic illness, has allowed me to see all aspects of medical costs. Ryan's plan is the right direction.
Thanks for the article.
Of course allowing the market to help determine the actual costs of drugs would save money for everyone involved. That's not the issue. The issue is the inherent contradiction in the arguments of people like Ezra Klein. Their argument boils down to this: If it costs the government lots of money, then we need to find a way to reform. Putting it in the hands of the market, while it will save money, will not save money fast enough or large enough. Therefore, we should find ways to have the government provide the service, even though it will cost the government lots of money.
It's a wonder why folks like James Capretta continues to give credence to people like Ezra Klein.
So is Capretta claiming that private insurers are better able to keep down costs of generic drugs compared with Medicare? How so? What's the mechanism here? Bigger=more bargaining power. So I don't see how a fragmented private market can be more efficient in negotiating prices down than big government.
You are right. The government should also purchase food, closing, gas, etc. for the folks and distribute it equitably. It would keep the cost of everything low as the government is "more efficient in negotiating prices down". The government can also plan such purchases years (five?) ahead - very efficient. Worked beautifully for the Soviet Union.
Having been a practicing primary care physician for the past 17 years, I have a different view of the decreasing costs of pharmaceuticals, and I really think that Medicare D has had almost nothing to do with it. What has happened over the past decade is that a very large number of mainstream state of the art medications have gone generic.(such as Simvastatin, Pravastatin, Hydrochlorothiazide, Lisinopril, Levothyroxine, Glyburide, Glipizide, Metformin, and the list goes on and on). Several large corporations have taken advantage of this and have generated the "$4 list of medications" that patients have been flocking to. This requires NO PRESCRIPTION PLAN WHATSOEVER. Companies doing this include Giant Eagle, Marc's, and Walmart. In fact, Giant Eagle is offering free antibiotics (Amoxicillin, Doxycycline, and Bactrim) and free diabetic medications (Glyburide, Glipizide, Metformin, and others). They are using these "gateway" drugs to get people into stores so that they will also purchase something that actually generates a profit for them while they are there. So from my view, Medicare D had little or nothing to do with the actual costs of these medications to patients. In fact, this cost decrease would have occurred without Medicare D at all. I greatly appreciate Paul Ryan's efforts to decrease the debt and balance the budget, but trying to credit Medicare D for the decreasing costs of pharmaceuticals is quite disingenuous. If anything, the government benefited from what private corporations were doing because many people did not even need to use Medicare D to get the medications that they needed.
So you're saying that Medicare negotiating with pharamaceutical companies is Communism, whereas Medicare paying private insurers to be the middleman in the negotiations is the height of freedom. Explain that one for me. What special talent and value do these private insurers add to the mix? Cutting-edge negotiation strategies? Sophisticated red-tape? what?
The difference is that private companies have to make profit and compete with each other, while the government is a monopoly of the worst kind. It can not "negotiate" in a normal sense of the word. It can intimidate, bully, reward political friends, punish enemies, but it can not negotiate. Any number that is a result of such a "negotiation" as an arbitrary number from the market point of view, not a balance of supply and demand. As the result, the most likely outcome of government dictating prices is that the private companies would stop supplying the services as it would be unprofitable for them. But no worries, the government can take over services as well, why just stop at purchasing?
And having both sides of the equation is even more efficient and allows for long-term planning, a la GENPLAN in the USSR.
Another classic contradiction by is exhibited by ArielD. He hates the fact that private insurers are involved in healthmaking decisions, but is okay with the government being involved in those decisions. People like ArielD never really explain why they prefer government involvement to private sector involvement and seem to get upset when people see more government involvement as the road to serfdom.
For the umpeenth time, what value do these private insurers add to the drugs negotiation process? Medicare and Medicaid are cheaper than private insurance precisely because they're stingy. And of course doctors don't like that. But you can't cry bloody murder about entitlement programs going bankrupt while demanding that the government pay top dollars for medical services and drugs.
Can't have it both ways.
Hey, lighten up on ArielD. He/She can't be expected to realize you cannot 'negotiate' when the party on the other side of the table has the power to shut you down if you don't agree to do exactly what they demand.
"Medicare and Medicaid are cheaper than private insurance precisely because they're stingy."
They are not stingy. They are thieves. They intend to pay (I am generalizing) $.80 for $1.00 worth of service. That is not bending the cost curve it is cheating people. Government can not simply set a price for a good and then demand the market comply. I refer you to the USSR, Cuba, Venezuela and et. al. for examples of what happens when that method of economics is adopted.
"And of course doctors don't like that."
And who can blame them? I have an offer for you. Come to work for me. I will guarantee you $.80 of pay for every $1.00 worth of your labor. I expect you bright and early next Monday AM.
On Ezra Klein’s arguments: Mr. Capretta may find it easy to dismiss them, but they seem quite valid to me. Yes, the insurance companies have been successful in moving people to generics, but wouldn’t that have happened anyway—when you have a product that is just as good and is a lot cheaper, why not use it? To me it seems of little consequence that the shift to generics has been more pronounced among the elderly than among the general population. The elderly, being largely on fixed incomes, are likely to be more sensitive than others to costs, and their meds, I would guess will have quite a different profile than those taken by younger people.
On Part D, I have a different take since I am now in the midst of trying to choose a plan from among 30 or 40 available. If I were an actuary in possession of all the data, I might find it possible to make a more intelligent choice among them; but I’m only a PhD mathematician, with just the data I find on the web, which is not enough.
For starters I’d like to know 1) what proportion of its income a plan spends on overhead, especially salaries for its top executives, 2) its premium history, 3) how much it spends on lobbying congress and what sort of positions it took in its lobbying, and 4) what its overall reputation is among its subscribers. None of this information is easily available.
On Ryancare: the Ryan plan is decidedly uninviting to this senior in his 74th year. It does nothing to address the core problem of rising costs, simply pushing them off on its victims, that is, us. And the prospect of a Ryancare something like the part D mess conjures nightmares—imagine being an old person with diminished mental capacities trying to deal annually with a plethora of “choices” with inadequate information! Give me a break.
Anyway, thanks, Capretta, for calling my attention to Klein’s columns—I’ll be paying more attention to them in the future. But maybe not to yours.
"... 1) what proportion of its income a plan spends on overhead, especially salaries for its top executives, 2) its premium history, 3) how much it spends on lobbying congress and what sort of positions it took in its lobbying, and ..."
I fail to see how any of these points help you to make your decision. The issues are medical and economic. If the plan provides the pharmaceuticals you require at the best price you can find (a price you are happy to pay) then what does it matter how much someone who works at that company is paid or their politics or how they spend their profits? It sounds to me as though you are allowing your politics to drive your medical care, a clearly unsound idea.
Furthermore, why are you counting the other fellow's money? Whatever the compensation of the executives is how is that any concern of yours? If they provide the best product at the best price what does it matter? Are you prepared to accept an inferior product at a higher price simply in order to know that the executives do not make too much money according to your standard (whatever that is?)
As for premiums, past history is no guarantee of future performance. In any case, if the premiums started to rise unacceptably I do not understand why you would not go elsewhere, that is what I did when my previous insurance policy breached my desired price point.
"... 4) what its overall reputation is among its subscribers."
This seems to be the only relevant question you have. How people feel about their plan is clearly a reflection of its performance, as far as those people are concerned.
Let me ask this question. Let us suppose that the 4th consideration is answered by very happy people who love the service and the price of the policy. Medically and economically it is everything you desire.
Let us further suppose that the company executives are over-compensated compared to their peers at other firms and they spend higher sums (according to whatever standard you hold) on their overhead and to lobby congress. Yet they are financially sound and stable. Let us lastly suppose that if premiums were to advance too high you could go elsewhere (you actually can.)
Given these facts would you do business with this company?
