Competition Works – At Least for Drugs

Last week, the Congressional Budget Office (CBO) released its annual updated projections for the entire federal budget, including health programs. And, in those projections, CBO dropped the projected ten-year cost for Medicare quite substantially—by $137 billion. The reason? Buried deep in the CBO report there’s this explanation: “the largest downward revision in the current baseline is for spending for Medicare’s Part D (prescription drugs).”

That’s an understatement. Of the $137 billion drop in the Medicare baseline, $104 billion—or 75 percent—was due to the drop in expected Medicare drug benefit spending. This is truly remarkable because CBO had already lowered the drug benefit baseline several times in the preceding years. With this latest revision, CBO’s part D projections bear almost no resemblance to what was expected to occur when the law was enacted in 2003….

And this is occurring in a program run entirely through private insurance plans competing with each other for enrollment among Medicare beneficiaries…. Those plans are offering seniors low-premium products with strong incentives for generic substitution, and—surprise, surprise—seniors are readily taking them up on the offer. It turns out that Medicare beneficiaries are just as eager to save on their monthly insurance premiums as everyone else in America. It’s just that this is the first time in the history of Medicare that they have been given the opportunity to cut their expenses by signing up with lower-cost options.

Jim Capretta.

Comments (7)

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  1. Benedict Popplewell says:

    Cue the “lightbulb” moment when a bunch of people realize the free-market CAN actually solve many of our problems. Comepition and limited oversight can work wonders.

  2. Bruce says:

    Competition works? DUH.

  3. Andrew O says:

    Interesting to see how the interplay between private insurance firms and government helps provide more competition and lower costs.

  4. Devon Herrick says:

    Doing away with the so-called Donut hole in Medicare will cause the cost to skyrocket. People often criticize the Medicare benefit design as being oddly-designed. But it serves a very useful purpose. It’s designed so seniors with low drug costs can get an affordable benefit. And seniors with moderate and high drugs costs and get a meaningful benefit at a cost that’s affordable to taxpayers.

    Part of the reason seniors are willing to substitute low-cost generic drugs for more costly drugs is because they are afraid of entering the Medicare donut hole where they are responsible for 100% of drug spending (up to something like $2000). Prior to entering the donut whole, seniors only pay one-quarter of the cost of their drugs. That means they are willing to spend four times more than they otherwise would spend on a prescription. However, the fear of being responsible for 100% if they enter this benefit gap causes them to be more vigilant.

  5. Gabriel Odom says:

    This makes me happy.

  6. civisisus says:

    So the Rx patent cliff is another reality you reality-challenged Goodmanites are only today becoming aware of? Little wonder people are so easily gulled by the NCPA health policy “experts”.

  7. Devon Herrick says:

    @ civisisus

    Read my post above. Yes, the so-called Patent Cliff is driving down the cost of popular blockbuster medications. But at least part of the reason seniors have not jumped to the new and improved versions of these branded medications is the benefit design and incentive structure that encourages substitution of generic drugs where appropriate. If Medicare Part D plans didn’t provide incentives, many seniors would be using the new Purple Pill rather than the old one that’s available over the counter. New drug innovation is very important to our health care system. But new (brand) drugs must compete with older, generic medications to ensure new drugs perform better.

    This sounds so simplistic that any drug plan should do it. But consider traditional Medicare; there is no incentive for seniors to consider price. State governments largely ran Medicaid drug program benefits in the past. There is little disagreement that privately ran drug plans are more efficient than state-run Medicaid drug plans.