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Competition in Part D: Is It All It's Cracked Up to Be?

By John Reichard, CQ HealthBeat Editor

June 7, 2012 -- A key question in the debate over whether Medicare should be redesigned based on the Part D prescription drug benefit is whether competition delivers savings.

The verdict at a forum this week sponsored by the Kaiser Family Foundation: Maybe so, but how much is murky.

The relatively low cost of the Part D benefit since it began in 2006 is one of the significant recent successes in health care policy making. Originally estimated by the Congressional Budget Office to cost $400 billion over 10 years, the benefit's cost has actually been about 30 percent lower.

Republicans, who developed Part D, the drug program, point to competition among Part D prescription drug plans as the reason for the lower-than-expected costs. Converting Medicare as a whole into a similar system of competing plans would save the entitlement program from financial ruin, they say.

However, a number of factors explain lower-than-projected Part D spending, Georgetown University Professor Jack Hoadley told the forum.

Hoadley, who was recently appointed to the Medicare Payment Advisory Commission, said CBO originally estimated that 87 percent of all Medicare beneficiaries would enroll in part D. But the actual figure in 2012 is estimated to be 73 percent, so the federal government has to pay out less.

Also, the CBO based its projections on estimates of total public and private spending on prescription drugs. But according to Hoadley it overestimated how that spending would increase.

CBO assumed 9 percent annual spending growth on national prescription drug spending after 2006, but the actual figure has been 4 percent. "This lower growth trend in the health system as a whole has meant lower spending for Part D," Hoadley said in a May 2012 paper that was distributed as part of the briefing.

Fewer costly new drugs have been approved since Part D started compared to previous decades, Hoadley said. And a major factor in lower than projected Part D spending has been that Medicare patients are using more generic drugs than CBO seers foresaw, he added. Generics accounted for 75 percent of the prescription drugs Medicare enrollees used in 2010, up from 61 percent in 2007, according to Hoadley.

The professor hedged on the impact of competition.

"It's true there are lots of plans in the market so there is a lot of competition," he told the forum. "But there's also a pretty good amount of market consolidation and market concentration. We're really in a situation now where a large share of all the market is just concentrated in a handful of the big firms."

He also observed that it has gotten easier to compare plans and to make choices because of tools like Medicare's online Plan Finder, which allows shoppers to pick the cheapest plan for them given the particular drugs they take. "But we still don't see a lot of evidence of people switching," he said.

Hoadley said that absent robust switching there "is a limit on what competition can do in this market."

James Capretta, a budget official in the George W. Bush administration who supports Part D as a Medicare overhaul model, said that when one considers average monthly premiums for drug coverage—$30, he said—Part D has been "a pretty remarkable success.

"Remember at the time of enactment in 2003 an amendment was offered to say that the beneficiary should pay no more than $35. If that had been locked in, we probably would have blocked it in and indexed it to something. They certainly would be paying closer to 50 dollars today instead of 30 dollars a month."

Capretta added that while enrollment has been below projections, that only explains about one-fifth of the difference between actual versus projected spending on Part D. "Eighty percent of what's happened in terms of the spending below what CBO projected was due to factors other than enrollment."

Capretta noted further that the switch toward greater use of generics, though to some extent a part of an overall trend in society, reflected how aggressively plans were pushing Medicare enrollees to use generics. That would not have happened if government, instead of market forces, were driving the use of generics, he said.

"Imagine if back in 2003 there was an amendment offered ... to say, 'you know what, let's forget this business of trying to have competition ... let's just make 'em go into generics.'" There would have been "a huge counter offensive by the brand name drug industry with ads" saying there are clinical reasons to make exceptions to mandatory generic drug substitution. "Maybe the branded team would have won." If the amendment had passed, "it would have come with 55 exceptions that would have gutted the whole thing." Instead, the move to generics has happened "naturally" because people have wondered why they are paying more for branded drugs and plans have nudged or "slightly more than nudged" people into generics by saying "'look, you can get the branded drug but it's going to cost you a lot more." It's the main reason people are only paying $30 today, Capretta said.

A third speaker, Marilyn Moon, a former Medicare trustee, said that trying to figure out what is attributable to what in Medicare is very difficult "because it is a very complicated plan and lots of things are going on.

"I don't find I disagree with very much of what's been said and that's the nature of Part D." Moon said she totally agrees that plans energetically pushed people into generics and that it would have been hard to make that happen through government coercion.

But, she said that it's important to be careful about saying what effects are attributable to competition and what is the result of other things. Moon she'd she's been trying to analyze that "and the further I get into it the harder it is to do."

Added Moon: "Everybody has some challenges in figuring this out."

In addition to trying to sort out the cost impact of competition in Part D, panelists addressed the larger question of whether it should be a model for overhauling Medicare generally.

Capretta acknowledged that delivering health care services is more complicated than dispensing drugs. "Part D should serve as somewhat of a model," Capretta said. But "I don't claim that the prescription benefit, which is largely a commodity we can mail, is the same as delivering" doctor and hospital services. "There is more complexity to delivery system reform."

However, Part D "gets the relationships roughly right in terms of who should do what,'' he said. "The government is not trying to figure out the right price for every drug." What it is doing is overseeing the marketplace and providing fair rules for the bidding process, he said. "And then it says to the beneficiary: 'We are going to give you an entitlement toward that coverage. That entitlement assures you guaranteed coverage through the Medicare benefit. But if you want a more expensive plan you'll pay more out of your own pocket.'"

It "puts huge incentive on those delivering the services to try to figure out ways to save money. And... innovation can come into the program, it can evolve and change over time. It's all not locked into stone."

But Moon said proponents of the approach Capretta favors are not talking about the level of government oversight of the market that exists in Part D. "There are a lot of ways in which one would have to be very careful in extrapolating" from Part D, she said.

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