NCPA - National Center for Policy Analysis


September 5, 2008

According to the National Bureau of Economic Research (NBER), a branded drug sold to an elderly consumer covered by a Medicare Part D plan cost at least 24 percent less than the same drug sold to an uninsured consumer.

Passed in December 2003 and operational in January 2006, Medicare Part D subsidizes prescription drugs for the elderly in the United States by contracting with private plans to provide drug coverage.  Part D enrollment is voluntary, and the government pays each plan a lump sum for each enrollee that chooses it.  The private plans, not the government, negotiate drug prices. 

A first year review of Part D\'s performance shows that the program is quite successful.  According to researchers:

  • Even though branded pharmaceutical prices on average rose from 2003 to 2006, sales moving from cash-paying patients to Medicare Part D patients increased much less than other brands.
  • Relative price declines were concentrated in therapeutic categories in which plans could pick and choose the favored drugs from a variety of therapeutic substitutes.
  • Interestingly, these price declines did not appear in the therapeutic categories in which there are very few substitutes for a treatment, suggesting that plans\' ability to shift sales among substitute products creates price competition.
  • Approximately half of Medicare recipients\' prescription drug expenses were paid for out of pocket, and the movement of Medicare recipients from cash-paying uninsured status to insured under a plan caused the observed decline in per unit prices.

Moreover, these results do not support opponents\' claims that leaving the federal government out of Part D price negotiations would cause branded drug prices to rise.  The results also suggest that elderly consumer would pay less for their prescriptions in a Part D plan with a zero subsidy than they would by paying cash, say researchers.

Source: Mark Duggan and Fiona Scott Morton, "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," National Bureau of Economic Research, Working Paper, No. 13917, April 2008.

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