Surprise: Medicare's Prescription Drug Benefit Is Delivering Drugs, Preserving Incentives for Drug Development

WASHINGTON, OCTOBER 16, 2008--Medicare's "Part D" prescription drug benefit fosters true consumer choice, Lambert van der Walde of the Centers for Medicare and Medicaid Services said at an AEI conference on October 14. He reported that while only 7 percent of Medicare enrollees chose the congressionally formulated structure, more than 64 percent--10.5 million people--were willing to pay higher premiums for what they perceived as greater benefits.

This would come as a surprise to those who skeptically observed Part D's implementation in 2006. With a projected cost of $780 billion over ten years, Part D was the largest expansion of Medicare since the 1960s. Many feared that it would create mass confusion among the elderly and produce huge increases in pharmaceutical prices. Now, two years after its implementation, academic studies show that those fears were misplaced.  Most seniors have been able to navigate the program easily, and more seniors now have drug coverage than in the past.

Helen Levy and David Weir of the University of Michigan presented data showing a decrease in the share of senior citizens with no drug coverage from 23 percent before Part D to only 7 percent afterward. However, they cautioned that while Part D lowered out-of-pocket costs when compared with no coverage, it was still no substitute for employer-based coverage, which saved its beneficiaries an average of $7 dollars more per medication than Part D.

But beyond this domestic success, is Part D the best model of reform available? How does Part D's performance compare to the European approach to prescription drug benefits? An early criticism of Part D was that without the government directly purchasing from and negotiating with pharmaceutical companies--as is the practice in many European countries--drug prices would only continue their record rise. Not true, asserted the University of Maryland's Mark Duggan. Plans are free to create incentives for their enrollees to move between comparable drugs within a therapeutic class, as long as at least two drugs are covered in each class. This provides pharmaceutical companies with an incentive to lower their prices in the form of a larger share of the market, measured by the number of enrollees. Duggan presented data that demonstrated the success of Part D in decreasing drug prices by 12 percent, augmenting the out-of-pocket savings of subsidies alone.

Further, the European model uses the breadth of the government's control over health care provision to force drug prices down in negotiations. Dana Goldman of the RAND Corporation argues that while this resulted in a 23 percent decrease in drug prices overall in Europe, it has an inevitable negative effect on pharmaceutical research and development. Goldman measured the consequences of decreased innovation in terms of projected decreases in life expectancy in the absence of a robust drug pipeline. His data suggests a decrease of one-fifth of a year of life for current generations, increasing to seven-tenths of a year of life by 2060. Medicare Part D lowers the cost of drugs to consumers through government subsidies, not price controls. While this saddles current generations with an immediate cost, Goldman said that it is "buying future innovation, so it's not such a bad thing, this liability we're passing on."

 --KRISTIN VISWANATHAN

For video, audio, presentations, and event information, visit www.aei.org/event1814/.

AEI's AEI Studies on Medicare Reform series includes several volumes on the scope of Medicare's problems and how to fix them. The Health Policy Outlook series includes several issues on Medicare, including a recent edition by Joseph Antos on why health reformers seem to neglect Medicare.

The AEI Press recently published Innovation and Technology Adoption in Health Care Markets, by Anupam B. Jena and Tomas J. Philipson. This volume explores why cost-control measures like those in Europe may suppress the innovation and development of the life-saving drugs of the future.

For media inquiries, contact Véronique Rodman at 202.862.4870 or vrodman@aei.org.

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