NCPA - National Center for Policy Analysis


November 29, 2006

The Medicare drug benefit has come in way under budget this year, which supporters say is a testament to the benefits of competition.  Instead of costing about $43 billion this year, it will cost about $30 billion.

The Centers for Medicare and Medicaid Services, the federal agency that oversees the new drug benefit for the elderly and disabled, provided the Associated Press (AP) with its accounting of where the program saved money this year:

  • Lower than projected enrollment -- $7.5 billion.
  • Competition -- $6.9 billion.
  • Drug prices rising less than expected in the two years before the benefit began -- $3.7 billion.

But over the next 10 years, the most important reason behind the program's lower costs will be the fact that drug prices rose less than expected in the two years before the drug benefit began, says John Shatto, a Medicare actuary:

  • Based on double-digit increases in drug prices in previous years, Medicare actuaries in 2003 projected they would rise 11 percent each in 2004 and 2005, the two years prior to the program startup.
  • Instead they grew by 7 percent each year.

The impact doesn't seem huge at first, but a snowball effect occurs when actuaries recalculate projected drug costs in future years based on what happened in 2004-05:

  • The government's projected cost of the Medicare drug benefit over the decade --  through 2015 -- is now $729 billion, almost $200 billion below the $926 billion original estimate.
  • About $141 billion of projected savings result from slower growth in drug prices that began in 2004.
  • By comparison, greater-than-expected competition accounts for $55 billion in projected 10-year savings.

Source: Kevin Freking, "Medicare Program Costs Down," Associated Press/, November 29, 2006.


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