The One Medicare Program that Actually Works

July 8, 2011

This is Avik Roy, writing in National Affairs:

This is Avik Roy, writing in National Affairs:

The most successful cost-control experiment in Medicare — the relatively new prescription-drug component called Part D … is a so-called “premium support” program. Seniors are given a set amount of money to apply toward their choice of plan, selected from a menu of private prescription-drug coverage options. If they prefer a more expensive plan, they can make up the difference themselves….

The program also contains a further cost-control mechanism that has come to be known as the “donut hole,” by which recipients are required to pay for all drug costs above a certain minimum level and below a ceiling — a design intended to simultaneously make seniors sensitive to prices yet shield them from catastrophic costs. In 2009, the donut hole required retirees to pay 100% of prescription-drug costs above $2,700 and below $6,154, in order to discourage unnecessary spending….

These two market-based elements have indeed kept costs down for this component of Medicare. While Medicare Part D has provided drug coverage to most Medicare recipients and is very popular with seniors, it has so far come in more than 30% below the original cost expectations of the Congressional Budget Office. In a recent report, the actuary of Medicare projects that Part D’s cost over its first decade will likely be more than 40% below those original estimates.