Why Medicare Part D Is the Answer to Health Reform

Congress could learn a lot from Medicare's prescription drug plan for health reform.

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Benjamin E. Sasse, Ph.D., a former U.S. assistant secretary of Health and Human Services under President George W. Bush, teaches at the University of Texas and advises health investors. 

As Washington continues its shouting over health reform legislation, too often it seems as if our only choice is between the status quo and the creation of an expensive new entitlement with politicians defining all the details of our health insurance. In fact, a more viable model for reform exists: the originally controversial, but now enormously successful, Medicare prescription drug program, Part D. 

When first proposed in Congress in 2003, Part D was criticized from all sides. Liberals—generally supportive of adding a drug benefit to Medicare—warned that Part D's private sector mechanisms could not possibly be trusted to meet seniors' needs. Conservatives—skeptical of adding a new entitlement program without first addressing budget shortfalls in extant programs—warned that the plan's cost estimates would inevitably be overrun. 

Happily, the centrality of choice and competition in this program has led Part D to vastly outperform all budget projections, and conclusively demonstrates that it is possible simultaneously to satisfy beneficiaries and to produce substantial savings relative to any other government program. 

The competitive market that the plan's proponents promised would drive down costs has done even better than their estimates. Premiums originally projected to be $44 per month have dropped to an average of $28 in 2009. In every state except Alaska, seniors have access to at least one Part D plan that costs less than $20 per month. From 2006-2007 (the last year of complete data), drug prices in the United States increased only 1.4 percent, and drug spending growth fell to 4.8 percent—the lowest rate since 1963. 

All of this means huge reductions in costs for taxpayers. This past March, the Congressional Budget Office decreased its 10-year spending estimates for Part D by $520 billion, compared to estimates made only three years ago. This simply doesn't happen in government programs. 

Today, 27 million seniors are enrolled in the program, bringing the total number of American seniors with comprehensive prescription drug coverage up to 90 percent. According to the Centers for Medicare and Medicaid Services, seniors with Part D coverage save an average of $1,200 per year on their prescription drug purchases. Lower-income seniors are granted even larger vouchers. And a recent poll released by the nonpartisan Medicare Today coalition shows 9 out of 10 Part D beneficiaries are "satisfied" or "very satisfied" with their plans. 

So what is going on here? Part of the story is that drugs are less expensive than hospital stays and procedures, which are often unnecessary if patients have timely access to medications. Far better for a patient (and for taxpayers) to have access to diabetes medication than to wait for care until he loses a foot. Preventing more costly care by making drugs affordable for seniors was a key goal of the Part D plan. 

A second element of the plan's unprecedented success is choice and competition. At the time of Part D's launch in 2006, critics said that offering dozens of plans made the program too complex for seniors to navigate. To simplify choices, Congress attempted to offer a single, one-size-fits-all drug plan to save seniors the trouble. But fewer than 15 percent of enrollees selected that standard plan, instead choosing coverage that fit their individual needs. 

The lessons are clear—consumers can be trusted to make good decisions. And when incentives are properly aligned, everyone wins. 

Medicare Part D is (or should be) a policymaker's dream: a government program that efficiently delivers high-quality services, and does so under budget. Unfortunately, throughout this year's healthcare reform debate, Part D's success has been at best ignored and at worst maligned. Instead of striving to find similar ways to stimulate aggressive competition to create value for consumers and taxpayers, the bill passed by the House of Representatives seeks to reduce choices and increase government controls by mandating specific coverage levels through Part D's so-called "donut hole." In spite of CBO's estimate that this move would drive Part D premiums up 20 percent—and even though 9 out of 10 seniors are happy with their current plans—Congress is advocating more central planning. Why?