As the political back and forth over Obamacare intensified this summer, it largely went overlooked that the Medicare prescription drug benefit continues to outperform expectations. In July, the Department of Health and Human Services (HHS) announced that the average premium for the drug benefit in 2014 would be just $31. That’s remarkable given that the average premium had held steady at $30 in the three previous years. HHS also announced that, because of very moderate spending growth in the program, the standard deductible would fall from $325 in 2013 to $310 in 2014.
Perhaps the reason that no one has taken much notice of this good news is because it has become so commonplace with the drug benefit. In December, it will have been ten years since President George W. Bush signed the new benefit into law. Very few federal programs have had such a successful first decade.
This was not the expectation of the law’s early critics. During congressional debate over the drug benefit, opponents openly predicted the program would fail because of its reliance on marketplace competition and consumer choice. They also predicted too few insurance companies would offer coverage, and that beneficiaries would stay away from enrolling because of its complexity. Most importantly, they predicted costs would soar without government regulation of prescription drug pricing.
All of these predictions have been proven wrong.
A new paper from Doug Holtz-Eakin and Robert Book of the American Action Forum documents the compelling record of the drug benefit. For starters, the primary objective of those who authored and pushed for the enactment of the program has been met, which is ensuring access to prescription drugs for America’s seniors. About 90 percent of the Medicare population is now enrolled in a drug plan of some sort. Most beneficiaries get their coverage through one of the private plans competing directly for enrollment within Medicare, but a sizeable portion of Medicare enrollees also get good coverage outside of Medicare through retiree benefit plans. The law facilitated the continuation of these plans.
And the beneficiaries like what they are getting. Surveys of beneficiaries since the program was implemented have consistently shown high consumer satisfaction with the drug benefit plans offered through the program. The most recent survey indicates that 92 percent of Medicare beneficiaries enrolled in a drug plan are satisfied with their coverage, with 58 percent indicating they are “very satisfied” with their current plan.
Further, costs for drug coverage and the prescriptions themselves have come in far below initial expectations. At the time of enactment, the expectation was that the average beneficiary premium for a standalone drug plan would be $35 in 2006. As of 2014, the average premium is still well below that level, and less than half of what it was expected to be by now.
The amazing cost record of the drug benefit is reflected in the continuous downward revisions of Congressional Budget Office (CBO) projections. As the AAF paper explains, the actual cost record to date is about half of what was expected at the time of enactment. As the actual program expenditures have come in far below previous projections, CBO has been forced to make major adjustments in its baseline estimates. For instance, in March 2011, CBO estimated that Medicare drug spending would total $1,081 billion over the nine-year period 2013 to 2021. By May 2013, the agency had lowered the expected cost of the program by nearly $200 billion over this time period, to $884 billion. The recent announcement from HHS of continued robust competition in the program and modest cost growth is likely to lead to another round of downward revisions from CBO in its January 2014 baseline.
What accounts for this remarkable record? The Medicare drug benefit works because it is a market-driven program. Unlike the rest of Medicare, in the drug benefit the federal government does not set the prices. Instead, private plans compete with each other and submit bids to the government indicating the premium they will charge to provide insurance coverage for prescription drugs. Those bids are based on the private negotiations between the insurers and the manufacturers of the products, as well as on the formularies used by the insurers to steer patients to lower cost options, especially generic substitutes for branded drugs. The government uses the bids from the private plans to set its contribution for coverage at a fixed amount based on a percentage of the weighted average premium. Importantly, the government’s contribution does not increase if a beneficiary chooses to enroll in a relatively expensive option. The additional premium for such a selection is paid entirely by the beneficiary. This design ensures that beneficiaries are cost-conscious when they choose their prescription drug plans, which in turn ensures that the competing drug plans strive to offer coverage at the lowest premium possible. This is the dynamic that has kept costs under control in the program and far, far below expectations.
Amazingly, though, the Obama administration and some of its congressional allies would like to mess with this success and introduce into the drug benefit more government regulation of drug pricing. The leading idea, proposed in the president’s 2014 budget, would require drug manufacturers pay Medicaid rebates on the products used by Medicare’s low-income seniors. But, of course, the introduction of this kind of mandatory rebate would distort the incentives that have worked so well to keep prices down for all seniors. For starters, the manufacturers will simply shift the cost of paying rebates for the drugs used by low-income seniors onto the rest of the Medicare population. The end result will be higher average premiums in the Medicare drug benefit for the vast majority of program enrollees.
Further, if the federal government is brought into the pricing equation, the negotiation between the private insurers and the manufacturers gets disrupted. Inevitably, the rebates would become the focus of legislative and regulatory wrangling, which means politics and crony capitalism will dominate price-setting instead of consumer preferences and market forces. Manufacturers will expand upon their already-sizeable armies of lobbyists to help them work the regulatory pricing system to their maximum advantage.
Instead of needlessly meddling in a program that is working, policymakers should extend the lessons learned from the drug benefit experience to the rest of the Medicare program. In effect, the drug benefit is a prototype of the premium support reform model that Congressman Paul Ryan has championed. And it shows beyond all doubt that competition and consumer choice can work in a health benefit program aimed at seniors. Contrary to what the critics have said, a consumer-driven system is not too complicated for Medicare’s beneficiaries, and their families, to navigate. Moreover, putting the beneficiaries, and not the federal government, in the driver’s seat is the best way to ensure cost discipline and true accountability among those providing the insurance and the services to patients.
The drug benefit was a contested and controversial piece of legislation in 2003. There were plenty of critics predicting its failure. Instead of failure, the program has established the model for how to fix the rest of Medicare too.
James C. Capretta is a Senior Fellow at the Ethics and Public Policy Center (EPPC) and a Visiting Fellow at the American Enterprise Institute.