The Secret to the Medicare Drug Benefit’s Success

President Obama has lamented the fact that “the cost of health care eats up more and more of our savings each year, yet we keep delaying reform.” As he and Congress consider how to make health care more affordable, they should look to the Medicare prescription drug benefit for inspiration.

By just about any measure – from overall cost to participant satisfaction – the drug benefit is working well. It’s a rare example of a government initiative that has been both successful and cost-effective.

What’s the secret to the drug benefit’s success? Competition.

Although publicly funded, the Medicare drug benefit is administered by private insurance companies. These firms compete against one another to offer each enrollee the best prescription drug plan for the dollar. Plans vary by price and available drugs, so each beneficiary is free to choose the one that best suits his or her needs.

Indeed, the drug benefit harnesses the same principle of market competition that drives prices down elsewhere in the economy:  Force companies to compete by offering consumers choice.

When it comes to the Medicare drug benefit, the competition is fierce. Nationwide, more than 1,800 drug plan providers are vying for seniors’ business.

Such vigorous competition explains why the program’s costs have been lower than expected. As of 2008, the drug benefit’s total costs are 40 percent lower than expected.

And even though the average premium increased by 24 percent in 2009 – primarily because seniors are using more drugs – beneficiaries still paid significantly less than was originally predicted when the program was created in 2003.Not only that, but participants have an opportunity to switch to a lower-priced plan at the end of each year durinthe Medicare drug benefit’s open enrollment season.

Competition also explains why enrollment in the drug benefit has grown sorapidly. Participating insurance companies, eager to add to their clientele, have worked hard to maximize enrollment. As of 2008, more than 25 million seniors were enrolled.

Perhaps most importantly, the benefit is incredibly popular with beneficiaries.

According to a Wall Street Journal/Harris Interactive study, 75 percent of seniors felt satisfied with their Part D drug plan in 2006, and a whopping 87 percent said they were satisfied at the end of 2007.

The lesson is clear. When private companies compete for customers, the quality of service goes up while costs go down. As former CMS Acting Administrator Kerry Weems recently said in congressional testimony about the Medicare drug benefit, “competition is working for beneficiaries and taxpayers alike.”

When policymakers sit down this year to hammer out the details of President Obama’s health reforms, let’s hope they remember this lesson. If they are serious about controlling costs and improving quality, then they should work to increase competition in the nation’s health sector.

(Grace-Marie Turner is president of the Galen Institute, a non-profit research organization focusing on free-market solutions to health reform.)

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