Lower-Than-Expected Medicare Drug Costs Reflect Decline in Overall Drug Spending and Lower Enrollment, Not Private Plans

Evidence Shows Reliance on Private Insurers Actually Raised Medicare Costs

By Edwin Park
Center on Budget and Policy Priorities, May 6, 2011

Some supporters of the House budget plan’s proposal to replace Medicare with a voucher to purchase private health insurance claim that reliance on private insurers can lower costs. They cite the fact that the costs of Medicare Part D, which took effect in 2006, have been lower than the Congressional Budget Office predicted when Congress enacted the drug benefit. They attribute this lower spending to efficiencies produced by competition among the private insurers that deliver the benefit.

This claim does not withstand scrutiny. The two primary factors driving the reduction in Medicare Part D spending were:

* The sharp decline in growth in spending for prescription drugs throughout the U.S. health care system.

* Lower-than-expected enrollment in Medicare Part D.

Moreover, there is evidence that, far from reducing costs, the use of private plans to deliver the Medicare drug benefit has increased costs.


Edwin Park has dispelled the myth that private insurers were to be credited for Medicare Part D drug spending that fell below prior projections of the Congressional Budget Office. The lower than anticipated spending had nothing to do with the interventions of the private insurers, but were due primarily to two factors: 1) lower prices due to greater use of generics, more drugs losing patent protection, and a lack of new blockbuster drugs, and 2) fewer Medicare beneficiaries than anticipated enrolled in these lousy Part D drug plans.

Not only can these plans not take credit for the lower than expected program spending, they, in fact, actually increased costs to Medicare. The reasons are explained in the technical but easy-to-read, three page report available at the link above.

Not mentioned in the report are the facts that these plans also reduced choices in drugs by having limited formularies, and they reduced choices in pharmacies by having restricted pharmacy networks.

This is yet one more example of how private insurance intermediaries increase our costs while reducing our choices of both providers and their products and services. Yet the Patient Protection and Affordable Care Act is based on this model that brings us fewer choices at higher costs.

Let’s oust these expensive, wasteful, intrusive intermediaries and replace them with our own public financing program that would offer all of us free choice and greater value.