Competition and the Cost of Medicare’s Prescription Drug Program
Targeted News Service |
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (generally referred to as the Medicare Modernization Act, or MMA) substantially expanded the federal
Most beneficiaries of Part D choose among private drug plans to receive their coverage; others have employment-based coverage subsidized by
Other government programs use different approaches to deliver prescription drug benefits and hold down the costs of those benefits. In particular, the joint federal-state
Broad national trends in the prescription drug market have contributed significantly to the lower-than-expected spending for Part D. Many health care analysts, including those at CBO, expected in 2003 that growth in national drug spending would slow from the rapid rates observed in the late 1990s and early 2000s, but the magnitude of the slowdown that occurred surprised many observers. Drug spending per person for the country as a whole increased by only 2 percent per year, on average, between 2007 and 2010, compared with average growth of 13 percent per year between 1999 and 2003, the five-year period before enactment of the MMA (see the figure below). Drug spending per person in Part D also increased by 2 percent per year, on average, between 2007 and 2010. The greater-than-expected slowdown that began after 2003 caused national drug spending in 2012 to be about 40 percent less than the amount predicted by analysts at the
Annual Growth Rates of Drug Spending per Person, 1990 to 2011
Two developments accounted for much of the slowdown in growth of national drug spending per person:
* Many existing brand-name drugs lost their patent protection and faced new competition from generic substitutes, which have the same active ingredients as their brand-name counterparts but are much less expensive. Between 2007 and 2010, the share of prescriptions filled with generic drugs increased from 67 percent to 78 percent nationwide (and from 63 percent to 73 percent in Part D).
* New brand-name drugs (which tend to be more expensive than older brand-name therapies) were introduced at a slower rate than in the late 1990s.
Spending per beneficiary in Part D has been lower than CBO projected in part because of those developments affecting nationwide drug spending.
In addition to spending per beneficiary, enrollment in Part D has been smaller than CBO initially projected - by about 12 percent in 2012. CBO initially projected the share of eligible people who would enroll in Part D on the basis of enrollment in similar government health care programs--in particular, Part B of
Taken together, the unexpected slowdown in national drug spending per person and smaller-than-expected enrollment in Part D can account for nearly all of the difference between CBO's original estimate and actual Part D spending. CBO's original estimate incorporated an expectation that elements of the program's design that were intended to foster price competition between private plans would help to limit costs per beneficiary. Because other factors have affected costs per beneficiary, determining whether the competitive design of the program has been more or less effective than CBO originally anticipated is not feasible.
How Has Competition Between Plan Sponsors Affected Part D Spending?
Each summer, every Part D plan submits a bid that reflects the total amount it would be willing to accept to offer Part D coverage for a
CBO analyzed bids for "basic stand-alone" Part D plans between 2006 and 2010 and found that plans in regions with more plan sponsors tended to have lower bids and premiums than those in regions with fewer sponsors. (Basic stand-alone Part D plans, which accounted for about half of total Part D enrollment over that period, offer a standard level of prescription drug coverage; CBO excluded from its analysis of plan bids stand-alone plans that offer more generous drug benefits, employment-based plans, and plans that combine drug coverage with coverage for other medical benefits, such as hospitalization and physicians' services.) Between 2006 and 2007, an average of 6 new plan sponsors joined the market in each of the 34 Part D regions that together cover
As Part D is currently structured, two features of the program could be changed to encourage plan sponsors to submit lower bids for their plans. First, in the component of Part D that serves low-income beneficiaries, the government usually pays the full amount of a plan's bid up to a threshold, regardless of whether other plans bid lower. Second, low-income beneficiaries enrolled in plans whose bid rises above the threshold are automatically reassigned in equal proportions to plans with bids below the threshold (unless a beneficiary has actively signed up for a particular plan). Both of those features encourage plans to set their bids close to (though below) the threshold.
Has Growth in Payments to Part D Plans Been in Line With Growth in Drug Spending?
The payments to plans by the government and beneficiaries for the basic Part D benefit increased more rapidly between 2007 and 2010 than did spending for drugs by those plans. Specifically, the payments to stand-alone plans for the basic benefit grew by 3.3 percent per year per beneficiary, on average, whereas plans' spending per beneficiary on drugs for the basic benefit grew by an average of 2.8 percent per year.
The difference between those growth rates represents an increase in the sum of plans' administrative costs and profits over the 2007-2010 period. Drawing firm conclusions about the cause of that increase is difficult, in part because of the short time frame of the analysis and a lack of information about whether the initial amounts of administrative costs and profits were unusually low. Nonetheless, some increase in the sum of administrative costs and profits could be explained by the reduction in the number of plan sponsors between 2007 and 2010. How Do Prices for Drugs Differ Between Part D and
For the drug classes representing the great majority of drug spending by Part D beneficiaries, CBO found that
The difference in average drug prices between Part D and
Some policymakers have proposed applying
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