A Decade of Success: How Competition Drives Savings in Medicare Part D

December 31, 2013

On December 8, 2003, then-president George W. Bush signed into law the Medicare Modernization Act (MMA). Without a doubt, the law created the most significant overhaul of Medicare in the program's history. As part of the MMA, a new, voluntary prescription drug program called "Medicare Part D" was enacted. Beginning in 2006, Medicare enrollees would also be able to sign up for outpatient prescription drug coverage through private insurance companies, with premiums subsidized by Medicare. To date, seniors have expressed high levels of satisfaction with the program, and Part D expenditures have been more than 40 percent lower than initial government estimates -- a rarity for a government health care program, say Paul Howard, a senior fellow, and Yevgeniy Feyman, a fellow, at the Manhattan Institute.

However, the program was controversial at the time of its launch in 2006 (and at the time of its passage). The root cause of Part D's success remains hotly disputed.

  • Part D proponents attribute the law's success to competition driven by the use of private plans, competition, and private-sector cost-saving innovations.
  • Critics attribute Part D's lower-than-expected costs to external factors unrelated to the program's design, such as lower-than-predicted enrollment as well as a general slowdown in national drug spending.

Howard and Feyman review data from the Centers for Medicare and Medicaid Services, the Congressional Budget Office and other sources, to examine which factors -- market competition, patent expirations or other national trends (including private-sector innovations such as tiered formularies and preferred networks) -- explain overestimates for Part D costs.

In their analysis, Howard and Feyman find strong evidence that:

  • National trends are not a sufficient explanation for Part D's success.
  • Consumer-driven competition is a relatively new tool in the government's effort to control health care costs.
  • Part D is an excellent model for future health care and entitlement reforms.

Howard and Feyman also suggest additional reforms for Part D, including a "shared savings" program for participating plans that would encourage them to focus on chronic disease management and prevention, reducing Medicare spending in other parts of the program.

Source: Paul Howard and Yevgeniy Feyman, "A Decade of Success: How Competition Drives Savings in Medicare Part D," Manhattan Institute, December 2013.

 

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