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Managing Medicare's Costs

Part D's controversy and value (1 of 3)

Medicare’s Part D is the perfect government program for these contentious times. Retirees embrace it and conservatives laud its cost-effectiveness. Yet kiberals say it enriches insurance companies and costs taxpayers 40% more than would a single-payer prescription drug program like that of the Veterans Administration.

If you compare its actual costs to projections when the program began in 2006, Part D has been a resounding success. Prescription drug spending per Medicare beneficiary is one-third lower than originally estimated, and the discrepancy between projections and actual costs has grown every year.

In 2012, for example, the original 2006 projections had anticipated $105 billion in drug spending, but the actual number is expected to be about $61 billion, or 42% lower. And in April, the Congressional Budget Office (CBO) dropped its ten-year Part D cost projections by more than $100 billion (that’s on top of last year’s $120 billion reduction).

For policy wonks, the discussion about whether Part D is a cost-effective way to provide drug coverage is a fascinating one. Partly that’s because Part D is so complicated that it’s sometimes difficult to separate causes from effects. Liberals contend that the main reason for the reductions is the large number of brand-name drug patents that expired in the last five years. They support their argument by pointing out that of the 75 most widely used brand-name drugs in 2006, more than one-half are now available in generic versions.

Conservatives agree that the loss of patent protection for brand-name drugs is a key factor, but they argue that the reason large numbers of seniors have switched to generics is that the Part D plans have pressed them to do by often charging the retail cost for brand-name drugs once the generic equivalents have become available. They say these higher prices for brand-name drugs usually cause people to switch to generic versions.

They also point out that 75% of Part D’s prescribed drugs are now generics, compared to 60% when Part D began six and one-half years ago. They say that a private-payer program like that of the Veterans Administration would have forced people into generics, even though in a few instances there are clinical reasons people need to stay with the brand-name drugs. Thus there’s ample data to support almost any position, and the discussions will likely go on for years. Three months ago the Kaiser Family Foundation published a thoughtful examination of the key reaons or Part D’s lower-than-expected costs.

Retirees remain happily unaware of the analysts’ to-and-fro. Seniors like the program in its current form. One survey last year found that 88% of those polled were either very satisfied (52%) or somewhat satisfied (36%) with their Part D coverage. And almost one-third of people with Medicare had no prescription coverage prior to 2006, so whatever its faults, Part D has been a splendid benefit.

Over the long-term, the ongoing policy discussions may result in more cost-efficient approaches. At the moment, though, what seniors need most is help in finding a low-cost plan for the prescription drugs they take. Part D’s byzantine structure makes this a challenging task.

Most people who enroll in a Part D plan stay there for years. Partly that’s because they don’t know how to go about finding a lower-cost plan. Only six percent of beneficiaries switch plans each year, according to the Medicare Payment Advisory Commission (MedPAC). Studies have shown that a high proportion of the other 94% pay too much for their coverage, typically by hundreds of dollars a year. Seniors’ failure to switch to a low-cost plan adds billions of dollars annually to program costs, 75% of which are paid by Medicare and 25% by beneficiaries.

Last year a study in the American Economic Review said that, based on a large sample of Part D enrollees, only 12% of people were in the lowest-cost plans for their drugs. The analysis said that these 12% reduced their Part D costs by 30% by choosing the lowest-cost plans. The remaining 88% overpaid by the same percentage. Other studies have also found that seniors are deterred by the difficulty of changing plans. The people least likely to change plans are the very elderly, who are typically those with the highest drug costs.

Medicare can do several things to encourage seniors to look for the lowest-cost Part D plans each year. A few well-placed national television commercials in the weeks leading up to annual open enrollment would probably more than pay for themselves in government savings. Also, Medicare could mail letters and promotional materials to beneficiaries, listing the toll-free numbers for assistance and explaining that they may be able to save money by comparing plans.

In addition, Medicare should continue to make its Plan Finder more user friendly. It’s the only way to identify the lowest-cost plans for a particular set of drugs. As it is, first-time users who want to compare Part D plans will search in vain for term “Plan Finder” on Medicare’s home page (medicare.gov). Instead, they must select the “Choose Drug and Health Plans” link to get to the Plan Finder page.

It’s likewise puzzling that Medicare uses “Health Plans” instead of the better known “Advantage Plans,” since the meanings are the same. Medicare substitutes “Health” for “Advantage” throughout the Plan Finder, and so it lists HMO’s and PPO’s as examples of Health (not Advantage) plans. But the national publication Medicare & You devotes an entire section to Advantage (not Health) plans. First-time visitors to the site may wonder if there’s a new type of plan they don’t know about.

In some cases, you may be able to reduce the chances of needing to change plans often. The simplest way is to choose the lowest-cost plan for the coming year. There also may be less need to change if you take three or fewer generic drugs, since costs are less likely to bounce around for generics.

If two plans’ annual costs are close, you might want to choose the lower-premium one. Premiums are not very good indicators of annual costs, so they shouldn’t be used as the only selection criterion (although that’s what many retirees do). Still, premiums are less resistant to annual price fluctuation than are co-payments and co-insurance. So, if you’re in a stand-alone Part D plan, you might choose a lower-premium option even though it costs a few dollars more each year. This is a risky tactic, though, if you happen to take a brand-name drug or more than three generic drugs, since cost-sharing and payment tiers can vary greatly from one year to the next.

One example of a lower-premium plan with low risk for someone taking generic drugs is the Humana-Walmart Preferred Rx plan, the lowest-premium national Part D stand-alone plan. In 2012 it has a $15.10 monthly premium and Medicare’s standard annual deductible of $320. Plan members have $1 co-payments for a 30-day refills of one of the plan’s 250 preferred generic drugs and $5 co-payments for another 1,044 generic drugs that aren’t on the preferred list.

Conservatives and liberals agree that Part D has greatly improved the health and financial landscape for seniors. When Congress enacted the drug law in 2003, more than one-third of Medicare beneficiaries did not have creditable prescription drug coverage. Today the number of seniors without drug coverage is only 10%.

A 2007 analysis in Health Affairs said that in Part D’s first year it trimmed seniors’ out-of-pocket costs for drugs by 18% while increasing their use of prescription drugs by more than 12%. And a 2011 study in the journal Health Services Research indicated that within a year after Part D went into effect, the hospitalization rate among seniors in one large sample declined by more than four percent. ◊◊

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