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 ought to 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 needs.

Indeed, the drug benefit harnesses the same principles of market competition that drive prices down elsewhere in the economy.

Take Lasik eye surgery, for example. We hear ads on the radio all the time with clinics offering the latest technology and the highest quality at lower prices than their competitors.

When it comes to the Medicare drug benefit, the competition is even fiercer.
Nationwide, more than 1,800 drug plan providers tussle 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 originally estimated.

And even though the average premium increased by 24 percent in 2009 - primarily because seniors are purchasing more drugs - beneficiaries still are paying significantly less than was originally predicted when the program was created in 2003. Not only that, but seniors in every state have an opportunity to switch to lower-priced plan during the Medicare drug benefit's annual open enrollment season.

Competition also explains why enrollment in the drug benefit has grown so rapidly. 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.

Some members of Congress have proposed having the government negotiate prices. But government doesn't negotiate; it dictates prices. And we know where this leads: To fewer choices of drugs, less attention to patient satisfaction, and ultimately a scarcity of new medicines.

The Medicare drug benefit program was created because many seniors, especially those with lower incomes, needed help in purchasing their medicines. Studies show that those who take their medicines are likely to stay healthier longer - and avoid complications that require much more expensive intervention and even hospitalization.

And while not perfect, the prescription drug 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 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 take a few pages from the Medicare drug benefit's playbook. If they are serious about controlling costs and improving quality, then they should work to increase competition in the nation's health sector.