Politics & Policy

Now They Tell Us

Competition is working for Medicare drug coverage.

Now they tell us. Less than a month after Democrats secured majority control of both the House and Senate in the midterm elections, the Washington Post reports that one of the key campaign promises pushed by national Democratic leaders in the 2006 election — revision of the 2003 Medicare drug coverage law to give the government an enhanced role — is a solution in search of a problem and could unnecessarily disrupt a benefit that is working well for seniors.

#ad#To understand the importance of this revelation, it is useful to revisit the political debate that occurred at the time the Medicare drug bill passed in 2003.

To the dismay of many conservatives at the time, both parties in Congress and the Bush administration never really disagreed over whether or not to expand the Medicare entitlement to include prescription-drug coverage. It was only a matter of time, proponents asserted, before the nation’s health-insurance plan for seniors would cover drugs in a way that is comparable to what most working Americans get through their employer-sponsored plans. The only real argument in 2003 was over how to do it.

The principal Republican authors of the law wanted to structure the drug benefit around competition and choice, not regulation and price setting. Most Democrats — even those who ended up supporting passage of the bill — wanted the new drug benefit to look more like the rest of Medicare, with the government running at least one of the insurance options and negotiating drug prices directly with manufacturers. Republicans generally opposed such an option, arguing that a dominant government-run plan would inevitably scare off private insurers already wary of making a significant investment in a new program. In the end, Republicans agreed to allow a government-run option to emerge, but only as a fallback in areas in which an insufficient number of private insurers stepped forward.

Even with this concession, the law that President Bush signed in December 2003 undeniably reflected Republican preferences, particularly competition. Under the rules established for the new benefit, Medicare beneficiaries choose annually from among private insurers competing for their business. The beneficiary premium and the government’s contribution toward the coverage are determined by this competition, not by a government reimbursement formula. And enrollment by beneficiaries is strictly voluntary; they are not required to get coverage if they don’t want it, even if they are signed up for the rest of Medicare.

Republicans believed that this competitive approach to providing drug coverage would work to the financial advantage of Medicare enrollees. With competition, private insurers offering coverage should have strong incentives to keep their premiums low and the cost sharing for the prescriptions affordable because, if they don’t, they will lose business — and revenue — to rival plans. At least that was the theory motivating the Republican design.

While it is still early in the program’s history — beneficiaries are in the midst of choosing their drug coverage for 2007, the second year of the program — all signs indicate that the benefits of competition and choice are not theoretical. Participation has been robust. Large numbers of private insurers — 266 companies in 2006 — are competing for business in the program, giving Medicare beneficiaries in every region of the country plenty of options to choose from. There has been no need for a government-run fallback plan. And beneficiaries are paying premiums that are far below initial expectations. The Post reports that the average government contribution per beneficiary could drop by 15 percent in 2007 compared to 2006. (This apparently assumes the 2006 enrollment distribution across plans continues unchanged into 2007.) With these favorable results, it is not surprising that 80 percent of Medicare beneficiaries who have signed up for a private drug plan are satisfied with what they are getting, despite a yearlong barrage of negative media coverage over the program’s complexity.

The early success of the Medicare drug program has important implications for the rest of Medicare, which is badly in need of reform. Program costs have risen rapidly nearly every year since the program started. From 1970 to 2004, the growth in Medicare costs per beneficiary has outpaced per capita economic growth by an average of 2.9 percentage points annually. The Congressional Budget Office projects that total Medicare spending, now 3.0 percent of GDP, will grow to 8.6 percent in 2050, using mid-range assumptions.

Past efforts at cost control have focused almost entirely on heavier government regulation and reimbursement cuts. New payment systems have been written for inpatient hospital services, physician fees, nursing homes, and scores of other service providers and products. Some of these efforts have been modestly successful — particularly payments for hospital stays — at slowing some cost growth and changing financial incentives within a narrow sector of the health-care system. Other payment reforms have been complete failures. Physician fees, for instance, are now scheduled to be cut each year to comply with a government-set budget that can control prices but not the volume of services provided.

But it is the larger pattern, not the success or failure of the individual payment systems, that is most relevant: Congress and Medicare’s administrators have spent four decades trying to control overall program costs through tighter reimbursement of providers, without success. There is no reason to believe ongoing efforts will ever produce better results.

Lower costs in Medicare will only come about when the health-care providers themselves have a strong financial incentive to organize themselves differently to deliver care more efficiently than they do today. And the only way to provide such an incentive that works is strong price competition and consumer choice.

While early, the new drug benefit is showing signs of fostering an effective competitive environment. At a minimum, Congress should give the program more time to work before contemplating any changes to it. And if it continues to prove its value, it should be viewed as a model for further reform, not a target for unnecessary government intervention.

 James C. Capretta is a fellow at the Ethics and Public Policy Center and was an associate director at the Office of Management and Budget from 2001 to 2004. He is also a policy research consultant for pharmaceutical and health-insurance companies.

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