Why Matt Yglesias Is Wrong on Medicare Part D

by Noah Glyn

Matt Yglesias has a post responding to Paul Howard’s oped in Bloomberg View about Medicare Part D. (If that’s not enough to get you excited, then I don’t what will.) Howard’s argument is that Part D is a “model” program, because Part D forces prescription-drug insurers to compete for customers’ premiums. These market forces, according to Howard, have successfully kept Part D prices down.

Not so, according to Yglesias, who claims that Howard “misses the main reason Part D has been cheaper than the CBO thought it would: We haven’t invented very many new drugs. Over time, existing drugs become cheap because they lose patent protection. Consequently, if newly unpatented drugs aren’t replaced by newer and better drugs then drug spending naturally falls.”

Moreover, according to Yglesias, during the negotiations over Part D, “Democrats were arguing for a cheaper alternative that would have offered similar coverage but without letting insurance companies take a slice off the top. Instead, the main savings would arise by letting Medicare ‘bargain’ for lower prices in a kind of de facto price control system.”

He’s wrong on both points. 

First, although the dearth of new drugs might explain long-term downward trends in drug prices, it can’t explain why Part D premiums were so much lower in 2006 than CBO had predicted in 2004. President Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act on December 8, 2003, but Part D didn’t really go into effect until 2006. Initially, some experts expressed doubts that insurers would want to participate in the program, but by November of 2006, there were 3,032 total plans, with each county in the U.S. having at least 27 plans to choose from. The competition was intended to keep prices low.

This feature of Part D has been successful. In 2003, CBO had predicted that Part D premiums would be $35 per month in 2006, but the actual premium were $23 a month; in 2007, premiums were $22 a month. Does Yglesias really believe that our failure to invent new drugs caused drug prices to plummet by over 30 percent in two years?

Yglesias is also wrong to suggest that having a Medicare “price-control system” for Part D coverage was expected to lower premiums. Though this has been a liberal talking point for over a decade, CBO addressed the issue at the time. In a letter to then–Senate majority leader Bill Frist, then–CBO director (and frequent NRO contributor) Douglas Holtz-Eakin wrote that allowing Medicare to negotiate prices would have a “negligible effect on federal spending because CBO estimates that substantial savings will be obtained by the private plans and that the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree.”

Of course, market forces haven’t been the only factor keeping prices low. The Kaiser Family Foundation has a nice summary of some of the other factors, and it does include as a reason for lower premiums, “Fewer drugs have been approved since the start of Part D, compared to previous decades,” along with six other possible explanations. 

But that’s one of seven reasons, and to discount the effects of market forces, as Yglesias does, is a serious mistake. 

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