Don’t Sink Medicare Part D With Price Controls: A TCCRI Issue Brief

In the budget battle in Washington, President Obama has advocated eliminating, what he terms, “subsidies to prescription-drug companies.” In fact, they are not subsidies at all. Instead, the President’s proposal would fundamentally change how Medicare’s Prescription Drug Plan works by eliminating the competition that makes this program (officially called Medicare Part D) successful and replace it with government price controls.

Unlike Medicaid and the other parts of Medicare, private insurers manage Part D. In fact, Part D’s “noninterference” clause explicitly prohibits Washington from negotiating directly with drug companies.

Instead, Part D lets seniors negotiate drug prices. It funds seniors and lets them choose among private drug plans. These plans, in turn, compete against each other and set their own prices with drug companies. This multiplicity of arrangements — rather than a one-size-disappoints all diktat — drives down costs without diminishing quality.

While exploding costs are undermining the long-term viability of other government insurance programs, Part D actually has outperformed its sponsors’ promises, a rare exception. The program’s costs are 45 percent below expectations, and premiums are about half of what forecasts originally predicted. Stunningly, 96 percent of participants say their plans work well.

In Texas, more than a million seniors choose from among 33 standalone Part D plans. Research shows that the program makes it easier for seniors to take their medications regularly. This limits health problems and reduces hospital admissions. Once again, this underscores what happens when government lets markets operate: Options proliferate. Satisfaction rises. Outcomes improve. And costs decrease.

As the Congressional Budget Office (CBO) repeatedly explains, private drug plans already are under enormous pressure to offer their customers the best prices possible. If they fail, more wily competitors will run them out of business. This keeps insurers on their toes and eager to please their price-conscious customers. In fact, when it comes to negotiating drug prices, Part D plans usually outperform other private insurers. Having Uncle Sam scream for artificially low prices will only yield negative results.

Some pharmaceutical companies will refuse to lower prices. This will separate dual eligibles from such manufacturers’ drugs. This painful fate already befell America’s heroic veterans when Washington bungled the VA’s drug benefit.

Former CBO director Douglas Holtz-Eakin estimates that such cost shifting could increase premiums by 20 to 40 percent. New drugs might debut at higher prices to offset price controls elsewhere. And even when drug companies absorb these expenses by eroding their profits, such losses will discourage laboratories from creating tomorrow’s miracle cures. This guarantees all Americans — but especially seniors — a future filled with fewer medical discoveries and more medical difficulties.

Medicare Part D is a real rarity: a government program that works. Part D provides seniors the medicines they need and keeps costs down. Washington should use Part D’s free-market approach to modernize other entitlements, not sink Part D through the failure of price controls.

Download a PDF of this TCCRI Issue Brief (PDF)