Avik Roy

Avik Roy, Contributor

The Apothecary is a blog about health-care and entitlement reform.

Pharma & Healthcare
8/05/2011 @ 2:51PM |4,619 views

George W. Bush, Health Reformer: Flat Medicare Drug Premiums Show That Choice and Competition Work

George-W-Bush edit

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Yesterday, The U.S. Department of Health and Human Services released data on average premiums for Medicare Part D, also known as Medicare’s prescription drug benefit. The average Medicare Part D premium in 2012, HHS projected, would be around $30.00, compared to the 2011 average of $30.76. “The announcement was based on bids submitted by Part D plans for the 2012 plan year,” HHS stated.

Stop right there and think about that. With all the teeth-gnashing about the inexorable rise of health costs, when have you ever heard about a health care program whose costs go down? Where are the celebratory articles from health wonks, pointing out that we may have found a way to bring the explosive growth of health spending under control?

There’s a reason you haven’t seen those articles: because Part D proves wrong the progressive conventional wisdom, that rising costs is a Rubik’s Cube that only boards of government-appointed experts can solve. Plus, Medicare Part D was passed at the behest of a certain former President who progressives don’t like. (Hint: his middle name is Walker.)

The HHS report comes on top of other impressive statistics for the market-based Medicare drug program. As Scott Gottlieb pointed out in recent Congressional testimony, Part D has had a spillover effect of lowering retail prices for generic medications by 19 percent. A new study published in the Journal of the American Medical Association suggests that, for beneficiaries with limited prior drug coverage, signing up for Part D was associated with reduced non-drug medical spending of over $1,200 a year.

As I wrote last month in National Affairs, Part D represents the “most successful cost-control experiment” in Medicare’s history:

The most successful cost-control experiment in Medicare — the relatively new prescription-drug component called Part D — has been proving this point. The Part D benefit, added in 2003, is a so-called “premium support” program. Seniors are given a set amount of money to apply toward their choice of plan, selected from a menu of private prescription-drug coverage options. If they prefer a more expensive plan, they can make up the difference themselves. Because this premium-support program is the only source of prescription-drug funding in Medicare, it is able to bring real market forces to bear.

The program also contains a further cost-control mechanism that has come to be known as the “donut hole,” by which recipients are required to pay for all drug costs above a certain minimum level and below a ceiling — a design intended to simultaneously make seniors sensitive to prices yet shield them from catastrophic costs. In 2009, the donut hole required retirees to pay 100% of prescription-drug costs above $2,700 and below $6,154, in order to discourage unnecessary spending. (Obamacare would eliminate this element of the program as well — sparing seniors from the donut hole, but thereby also shielding them from market forces that can help restrain costs.)

These two market-based elements have indeed kept costs down for this component of Medicare. While Medicare Part D has provided drug coverage to most Medicare recipients and is very popular with seniors, it has so far come in more than 30% below the original cost expectations of the Congressional Budget Office. In a recent report, the actuary of Medicare projects that Part D’s cost over its first decade will likely be more than 40% below those original estimates.

Some market-based reforms, then, can work. The premium-support model of Medicare Part D has been a great success. But its application has been limited, and overall Medicare costs continue to climb.

Those who claim that government-run health care saves money usually ignore the examples of market-based systems, like Medicare Part D and the universal-coverage system of Switzerland. The two key components of these programs are (1) making sure that beneficiaries share in the costs of their care through deductibles, co-pays, and the like; and (2) creating a true market in which individuals choose plans for themselves from a broad menu. It is no coincidence that these two features are central to Paul Ryan’s premium support plan for Medicare reform which passed the House this year.

When Part D was launched, liberal pessimists argued vociferously that the program would fail, because seniors would be “too confused” to choose amongst a blizzard of plans. It is just one more example of the fatal conceit that average Americans aren’t competent enough to manage their own affairs, and that central planners can do better.

There is a third component to which we must also pay attention: competition among providers. When it comes to medicines, prices come down because drug manufacturers compete with one another, especially when a drug’s patents expire. Indeed, thanks to a brilliantly-designed 1984 law sponsored by Sen. Orrin Hatch (R., Utah) and Rep. Henry Waxman (D., Calif.), America is blessed with the most efficient market for generic drug substitution in the developed world: over 75 percent of all drugs prescribed in America are generics. This compares to only 15 percent in France and just 7 percent in Italy, two countries with socialized systems and drug price controls.

When it comes to hospitals, on the other hand, government regulations actively prevent competition. Obamacare has made this problem worse, by banning the construction of new physician-owned hospitals that would complete with the lumbering, lobbyist-sponsored incumbents.

Choice and competition work in the rest of the economy, and despite Ken Arrow’s protestations to the contrary, they work in health care too. Progressives can achieve their goal of universal health care, but only if they come to appreciate how much market-based reforms would make health care affordable for all.

UPDATE: John Goodman links to an NBER study by Gary Engelhardt and Jonathan Gruber that concludes that four-fifths of Medicare Part D spending replaced already-existing private coverage.

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  • mmcassidy mmcassidy 1 year ago

    I read with interst your commentary on Part D, as I had read a small articlealready, however, it was a surprise to me to see Switzerland compared to US, only becasue I just read TR Reid book, and in that he makes clear, Switzerland provides univerisal coverage, and insurance coverage is not for profit for basic coverage, and all users citizens are required to buy health insurance.
    Those are 2 key differences, among others that we do not have in our mish mash system in the US.There is competition in Switzerland, it did help control costs, not necessarily drug costs, but the key differences were and are universal coverage, not for profit insurance coverage on basic coverage, and a requirement that all users pay.
    And, it came about because the Swiss realized that their model in the 90′s(same as ours) denied coverage to 5% of the citizens. We deny to about 16%
    That’s quite different from US and slightly disengenous on your part to compare US to Switzerland, or any other country in the industrial world, when it comes to per capita and health outcomes.

  • Avik Roy Avik Roy, Contributor 1 year ago

    Hi mcassidy,

    Thanks for your comments. You will see that I address your points about Switzerland in this post (the link was broken before, sorry):


  • jhoger jhoger 1 year ago

    Exchanges are a market based reform. Relying on private market insurance is of course a market based reform. Democrats don’t have any problem with market based reforms. We have problems with market failures and inefficiencies, which is why we needed reform in the first place.

  • Avik Roy Avik Roy, Contributor 1 year ago

    Sure, so let’s put all Medicare and Medicaid patients onto the Obamacare exchanges. That would be a significant improvement upon our current system.

  • jhoger jhoger 1 year ago

    Hold on, ObamaCare, what’s that? Oh, yeah, that’s the hyper-partisan term for the PPACA.
    Anyway, you’re suggesting we trade 5% government overhead to run Medicare for average 20% overhead from the private sector… I’m left scratching my head. Overhead is overhead except that the government’s is lower.
    Seniors like their Medicare just fine, and they are unlikely to let us put them on the exchanges. It certainly makes raising the eligibility age more palatable. Further the oldest and therefore sickest patients being dumped onto the exchanges would be a drastic, unplanned-for change. They are customers only a government could love. Premiums would go up for everyone else. But we’re socializing the cost any way we look at it.
    The bottom line though is that Granny and Gramps aren’t going to let that happen.
    As to Medicaid patients on the exchanges with, presumably a beefy voucher/premium support… I haven’t heard that one before, I’d need to hear more. It might be an improvement.

  • Avik Roy Avik Roy, Contributor 1 year ago

    If I am a mouth-breathing hyper-partisan when I use the term “Obamacare,” what am I when I use the term “Romneycare”?


    Here are some things for you to reflect on regarding Medicare’s administrative costs:


    As to the argument that we shouldn’t do something just because some seniors won’t like it: (1) there are other people whose interests matter than seniors; (2) if Democrats didn’t demagogue Medicare reform, seniors wouldn’t be as up in arms.

  • jhoger jhoger 1 year ago

    Hey, I didn’t accuse you of breathing out of your mouth ;-) . I just like ACA or PPACA because it is not a charged term. Do you call RyanCare RyanCare? Of course, maybe Forbes has a policy requiring use of the term ObamaCare. It seems pretty common on here even among liberal commentators.

    As to your article about Medicare’s overhead… sorry, but I just don’t buy it. Medicare doesn’t have huge executive salaries, or marketing expense, or pay out dividends to shareholders. You say that a private company doesn’t have ability to “off budget” things to IRS or whatever. Of course, in MBA school we called that synergies and “economies of scale.” That doesn’t make the efficiencies gained from the government performing the insurance any less valid. It just demonstrates WHY government can be more efficient than any private company, economies of scale.

    To be fair, this doesn’t mean private companies are doing anything wrong to make them less efficient. It just means, the government being one large mega insurer with various agencies that are available to help it perform its functions has opportunities for efficiencies that one private company of a particular type among many other private companies does not.

    Your analysis is of “per beneficiary” is on shaky ground. Sadly, for a good comparison we would need to find a private insurer who handles Medicare age beneficiaries to do a proper comparison. Otherwise we are comparing apples and oranges, since Medicare beneficiaries are different than the regular population. I will concede though that if you are making this error, then so was I.

  • jhoger jhoger 1 year ago

    Exchanges are a market based reform. Relying on private market insurance is of course a market based reform. Democrats don’t have any problem with market based reforms. We have problems with market failures and inefficiencies, which is why we needed reform in the first place.

  • Avik Roy Avik Roy, Contributor 1 year ago

    “Do you call RyanCare RyanCare?”


    Not sure on what basis you say my per-beneficiary analysis is on shaky ground. As you suggest at the end of your comment, the entire point is that Medicare beneficiaries are older, and on average sicker, than the typical privately-insured patient.