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  • Medicare Part D Proves That Competition Lowers Health Care Spending

    Some policymakers have difficulty understanding competition’s role in health care. There is a historical reason: With a legacy of third-party micromanagement, something like Medicare Part D—a program where about 1,100 drug plans compete for enrollees—is remarkably foreign. Several analysts cite this program as a marked success for competition in health care. However, a recent Kaiser Family Foundation issue brief claimed that the effect of competition was overstated and unclear.

    Interestingly, the arguments intended to downplay the role of competition actually provide evidence that Medicare Part D competition is working. Consider these examples.

    Departure from original cost projections. There was a difference between budget projections and actual spending in Part D, which can be explained partly by an overestimate of Part D enrollment; still, market competition clearly provided savings. Enrollment in Medicare Part D was lower than the original Congressional Budget Office projections over the past six years by an average of 7.1 million people per year. Research calculations show, however, that this effect can account for only 17 percent of the difference in actual cost.

    Prescription drug costs. One example of competition working is the “flat price trend.” In other words, people substitute their brand-name prescriptions with generics in order to save money. For example, if a patient was taking Niaspan, which averages around $125 for a prescription, he could switch to Niacin, a generic version, which costs $70 on average for the same refill. Many Medicare beneficiaries switch to generics just for this reason. Although brand-name drugs have experienced a modest increase in price, this generic effect has kept prices of prescription drugs relatively constant. Hence, spending grows more slowly.

    Those who downplay the role of competition claim that such behavior is not competitive, but understanding this behavior in a context without competition is simply impossible. As Joseph Antos of the American Enterprise Institute points out, “If we paid for each individual prescription the way we pay for each individual health service, there would be no incentive for drug plans to encourage the use of generics over brands.” Competition in Medicare Part D allows individual choice to play a role in prescription drug consumption. This directly encourages generic substitution, since individuals seek out the best value.

    Few patients switching plans. Another critique of competition is that a general reluctance to switch plans “reflects the large number of plan choices available combined with the costs in terms of time and energy of doing research and of actually making a switch.” This claim, taken from behavioral economics, does not negate a person’s price sensitivity. Experience with the Federal Employees Health Benefits Plan (FEHBP) shows that about 5 percent of patients switch plans each year. This reluctance to switch reflects well-documented satisfaction with plan choices. This only proves that people make decisions based on many factors, including how much they like their plans.

    Considering the growth figures in Medicare, competition appears to be working. Spending in Medicare Parts A and B has grown at an average of 4.9 percent over the past six years, while Medicare Part D grew at 2.8 percent. Imagine if total Medicare spending grew at 2.8 percent—as opposed to its actual growth rate of 8.7 percent. This is the effect of market-based reforms. For example, if Heritage’s Saving the American Dream plan had been implemented five years ago, annual Medicare spending growth would have likely topped out at 3.5 percent.

    In health care, competition allows individual behavior to drive down costs and constrains spending without top-down mandates that ultimately limit choice and freedom. A fundamental shift toward reform that focuses on consumer choice and market competition, like Heritage’s Saving the American Dream plan, is good not only for the federal budget, but also for the individual who desires to secure the best value for his or her health care dollars.

    Posted in Obamacare [slideshow_deploy]

    4 Responses to Medicare Part D Proves That Competition Lowers Health Care Spending

    1. Blair Franconia, NH says:

      Obamacare doesn't do that.

    2. Sandy Oddo says:

      How do I unsubscribe to this website? Thank you

    3. Andrew Simopoulos says:

      “Medicare Part D Proves That Competition Lowers Health Care Spending,” a recent Heritage Foundation blog post claims. But a key figure that it cites as evidence is wholly incorrect.

      The Medicare Part D drug benefit, which private insurers deliver, has cost much less than the Medicare trustees and the Congressional Budget Office (CBO) originally expected. House Budget Committee Chairman Paul Ryan and others argue that these lower costs support his proposal to convert Medicare into a “premium support” system, in which beneficiaries would receive a voucher to buy private coverage or traditional Medicare.

      But, as our analysis and a recent Kaiser Family Foundation report show, private insurers have had little or nothing to do with Part D’s lower-than-expected spending. According to our analysis:

      Under both the trustees’ and CBO’s estimates, more than half of the lower Part D costs for the drug benefit’s first five years (2006-2010) came from lower-than-expected enrollment.
      The rest of the savings came from lower per-beneficiary costs, which in turn reflected a slowdown in per-capita prescription drug spending throughout the U.S. health care system as patents for costly drugs expired, fewer blockbuster drugs came to market, and use of generic drugs rose.

      Trying to downplay these findings, Heritage cites a 2011 op-ed claiming that lower-than-expected enrollment accounts for only 17 percent of Part D’s lower costs. That figure is based on the op-ed’s rough calculation that enrollment accounted for $92 billion in lower Part D costs between 2006 and 2013.

      But the difference between CBO’s current estimate of net Part D costs through 2013 ($363 billion, after subtracting payments that Medicare receives from beneficiaries and states) and its original estimate ($550 billion) is only $187 billion. And $92 billion is about half of $187 billion, not 17 percent of it.

    4. Emma Hunt says:

      We must replace Oboma while we still have the time and before we loose our freedom.

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