Can privatization cure what ails Medicare?

U.S. Representative Paul Ryan thinks so. The House Budget Chairman points often to the Medicare Part D prescription drug program as proof that competition among private insurers has saved billions for taxpayers. It’s a key line of defense in the Republicans’ controversial plan to replace traditional Medicare with a privatized voucher program.

“The prescription drug benefit came in 40% below cost projections because it harnessed the power of choice and competition,” Ryan said on NBC’s Meet the Press last month.
The Part D program does use a privatization model where insurance companies compete to provide prescription drug benefits to seniors, and government picks up part of the tab — with seniors paying the remainder out of pocket.

Government spending on Part D is running far below projections made by the Congressional Budget Office (CBO) when the drug plan was first created. Spending totaled $52 billion in 2010 net of beneficiary premiums and some other adjustments, compared with the original projection of $73 billion back in 2003 (a saving of about 29%).

But it’s not clear that the lower spending results from Part D’s privatization features, says Edwin Park, vice president for health policy at the Center on Budget and Policy Priorities. “There’s been a significant slowdown in prescription drug use over past 10 years compared with the late 1990s, when use was growing at double-digit rates,” he says. “So the primary driver of the lower Part D spending is that systemwide drug costs are well below what was driving the assumptions back then.” Other key factors for the spending slowdown include a diminished pipeline of blockbuster drugs with patents, which tend to be more expensive, along with increased usage of cheaper generic drugs.

Enrollment in Part D also has been lower than expected. The Congressional Budget Office’s initial projection assumed that 90% of enrollees in Medicare Part B (doctor’s visits and outpatient services) would enroll in Part D; the latest figures indicate that 77% are enrolled. Park thinks that reflects more seniors staying in other types of plans — such as those offered to retirees by former employers — and others who simply are going without coverage due to the cost of premium payments.

Park argues that Part D’s privatization feature actually has driven costs up for some seniors — those who are “dual eligible” for both Medicare and Medicaid. Before Part D was created, these low-income seniors received drug benefits through Medicaid, which requires participating drug manufacturers to negotiate substantial price discounts. Those seniors now receive drugs through Medicare Part D, but Park says the private insurers haven’t been as successful negotiating discounts.

But one healthcare industry consultant thinks the Part D program’s track record does support the case that private competition in Medicare produces innovation and cost-saving — even though the data is somewhat murky.

“There has been more creativity in the program than anticipated in how aggressively [insurers] negotiate discounts, the type of benefits they’ve fielded and the tradeoff between premium levels and co-payments,” says Dan Mendelson, CEO of Avalere Health. “The fact that there are 30 plans or more offered in every region of the country gives seniors a real palette of plan choice — much more than the federal government would ever have mustered on its own.”

So, the evidence from Part D is mixed. What does seem clear is that Ryan’s Medicare privatization scheme would save taxpayers money the old-fashioned way — by shifting risk from the government to seniors. The plan essentially changes Medicare from a defined benefit program that promises a certain set of services to a defined contribution plan — one that only promises a certain cash contribution.

The average voucher in 2022 would be $8,000, according to the Congressional Budget Office’s analysis of the Ryan plan. Seniors would make up the difference between the voucher’s value and whatever private plan they ultimately bought. The voucher amount would rise annually geared to enrollee age and for inflation, which always lags healthcare inflation. That means the share of overall care paid for by seniors would jump annually.

Another little-discussed benefit cut in the Ryan plan is that it calls for slowly raising the eligibility age for any form of Medicare coverage starting in 2022, until it reached 67 in 2033.