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Don't Slash Medicare In Last-Minute Budget Agreement

Sally Pipes

The weather isn't the only thing heating up in Washington.

White House officials are feverishly negotiating with congressional leaders to raise the debt ceiling and reach a two-year budget deal that averts more than $126 billion in automatic spending cuts.

Democrats want the deal to dramatically raise domestic spending levels. Republicans want to offset those increases with cuts elsewhere. So on Thursday evening, the president sent House Speaker Nancy Pelosi a list detailing $574 billion of possible spending cuts and reforms. One of those proposed offsets would fundamentally transform Medicare's "Part D" prescription drug benefit.

I've long advocated systemic reforms to Medicare. And the White House is right to call for offsets. But it'd be a mistake to target Part D, a successful, comparatively free-market program that helps nearly 45 million Americans afford their prescriptions. The proposal would hurt vulnerable seniors and stifle medical innovation.

Congress created Part D in 2003, and since it took effect, it has helped seniors and people with disabilities access life-saving medicines. More than 80% of beneficiaries are satisfied with their drug coverage. And Part D came in well below budgetary projections, costing almost $350 billion less than anticipated in its first decade.

The program's success stems from its market-based structure. Private insurers sponsor plans and sell them to seniors. The government subsidizes and regulates these plans, but otherwise, it doesn't interfere. This forces insurers to compete with each other for beneficiaries' business.

This market competition helps keep beneficiaries' premiums down. The average Part D premium totaled just over $39 a month in 2019, a decrease of 4% from the previous year.

To attract customers, insurers offer a variety of plan options that meet different beneficiaries' needs. This year, enrollees could choose from 27 plans, on average. That's four more than in 2018. All of these plans offered various drug coverage, premiums, and cost-sharing responsibilities.

By keeping seniors healthier, Part D helps reduce other healthcare spending. According to one study published in the American Journal of Managed Care, "Part D led to nearly $2.6 billion in reductions in medical expenditures" for beneficiaries with congestive heart failure in 2012 alone.

Despite Part D's track record, proposals to meddle with the program abound.

One idea that's gaining steam—and may be considered during debt-ceiling negotiations—is what's known as "inflation penalty." This would require drug companies to pay "rebates" back to Medicare if a drug's price rises faster than inflation. For instance, if a firm raises the price of a $100 medicine by $5—but inflation only rose 2% that year—the company would owe the government a $3 rebate.

This change would undermine the very structure that has made Part D so successful.

Currently, Part D insurers negotiate massive discounts and rebates with drug makers; this is how they keep premiums low for patients and stay competitive. But under the proposal, the incentive to negotiate would vanish, since the government—not the private insurers who sponsor Part D plans—would hoover up any rebates. Beneficiaries' premiums might even rise if the government, rather than private insurers, starts taking these rebates.

The proposal would also stifle drug innovation. Developing a single new drug costs nearly $3 billion. And only a small percentage of medicines entering clinical trials ever make it to patients. Firms will only pursue these risky projects if there's a chance to recoup their development costs and potentially profit.

The inflation penalty would prevent drug companies from updating their prices in response to market demand. This de-facto price cap would reduce companies' chances of profiting from their successes. Research spending would plummet—and so would the number of new drugs arriving on pharmacy shelves.

Medicare Part D is one of the government's only successful entitlement programs precisely because it relies on private-sector competition. Adjusting the program could lead to higher premiums for beneficiaries and fewer new therapies. Let's hope the White House and Congress find a smarter way to offset the cost of any budget deal.

