ObamaCare Weakens Medicare Drug Program That Works

Commentary by Devon Herrick

Source: Investor's Business Daily

Nearly 36 million Medicare beneficiaries, including seniors and the disabled, have subsidized drug coverage through Medicare Part D. Overall, seniors are highly satisfied with their drug plans; satisfaction rates average about 90% to 95%. However, this may change.

The Centers for Medicare and Medicaid Services (CMS) wants to block seniors from enrolling in the most popular plans: those that offer lower costs in return for patronizing a preferred pharmacy network.

The Medicare Modernization Act (MMA) was signed by President Bush in 2003 — creating the Part D drug program. His administration, with the support of congressional Democrats, wanted Medicare Part D to be composed of private drug plans that vigorously compete for seniors' patronage.

By almost any measure the Medicare drug program has been a success, with costs far less than originally projected. In 2006 the program was projected to cost $127 billion by 2013. Yet program costs in 2013 were only about $72 billion, based on initial estimates from 2012.

Participating seniors currently have a wide range of choices. Nationwide, 1,169 Part D plans compete in 34 regions for seniors' business. The number of plans varies among states, from a low of 28 in Alaska to a high of 39 in Pennsylvania and West Virginia.

Enrollees can choose from plans that feature low premiums but higher cost-sharing, or more expensive plans that require little out-of-pocket spending. The least expensive plan is $15 per month, but most seniors choose plans costing more than double that amount. On average, seniors choose plans costing about $38 per month.

By some accounts, CMS thinks seniors have too much choice. In January the Medicare program proposed new regulations that would reduce the types of plans seniors have access to - something the MMA explicitly prohibits.

From its inception, the MMA specifically blocked Medicare from taking sides in the negotiation process (i.e. interfering) in the contract negotiations among drugmakers, pharmacy networks and drug plan sponsors.

But some Medicare administrators remain skeptical of the MMA's noninterference provisions - presumably believing they could do better. CMS bureaucrats want to restrict drug plans from offering seniors a choice of preferred pharmacy networks.

Medicare Part D increasingly has adopted exclusive preferred pharmacy networks as leverage to negotiate lower drug prices for seniors. Negotiated prices are the result of bargaining power - the ability of the drug plan to deny business to a firm if the bid isn't favorable.

The Obama administration, however, wants to prevent drug plans from excluding the losing bidders from participating in a drug plan. This weakens a drug plan's power to bargain for lower prices on behalf of seniors.

Without knowing that a "losing bid" risks potentially losing out on virtually all business from seniors enrolled in a given Medicare drug plan, pharmacy networks will have little reason to offer low prices in contract negotiations.

Medicare's reasoning is that preferred networks cost taxpayers more — sometimes. CMS' own analysis finds preferred networks cost less three-fourths of the time. Go figure!

Seniors and taxpayers alike have an incentive to hold costs in check. Although subsidized by Medicare, the premiums seniors pay are a function of the plan they choose — and ultimately of total program expenditures.

Premiums have remained affordable because preferred pharmacy networks provide seniors an incentive to control their spending by, say, asking about generic drugs or choosing a preferred network with lower cost-sharing. It's made a huge difference: Per-member drug spending has been far lower than projected.

Nearly a decade ago the Medicare Trustees projected a per-capita benefits cost of $1,971 in 2006, rising to $3,047 by 2013. But the actual per capita cost in 2013 was only $1,846 — a savings per enrollee of nearly 40%.

Preferred pharmacy network plans are among seniors' most popular options. But under proposed regulations, nearly 14 million seniors will have to find a new (more expensive) plan.

According to the actuarial firm Milliman, this regulatory change actually would cost the Medicare program nearly $1 billion a year and would add more than $9 billion to the cost of the Medicare Part D program over the next decade.

In the process it will also raise seniors' drug plan premiums and reduce their plan options. Seniors — and taxpayers — will be losers if this option is taken from them.