Medicare Part D Spending Lower than Projected

The centerpiece of the Medicare Modernization Act of 2003 was the Part D prescription drug benefit. The cost of the program has been approximately 30% lower than projected by the Congressional Budget Office (CBO) during the Congressional debate on the bill. Reasons for the lower-than-expected costs have been the subject of much discussion among policymakers.

The Henry J. Kaiser Family Foundation recently released a brief that examines trends in drug spending in Medicare Part D and the factors that have contributed to the lower costs. The brief, Medicare Part D Spending Trends: Understanding Key Drivers and the Role of Competition, was written by Jack Hoadley, PhD, Georgetown University, Washington, DC.

Some policy analysts have attributed the lower spending to the role of competition among Part D plans, but, according to Dr. Hoadley, the factors that have played a role in the lower costs are varied, including: (1) Part D enrollment has been 15% lower than anticipated; (2) the growth in overall spending on prescription medications has slowed since the CBO’s original projections; (3) costs that account for use of generics have increased slowly; (4) there have been fewer new medications approved since 2003; and (5) the percentage of use of generic drugs has increased.

Reasons for lower than anticipated enrollment in Part D include Medicare beneficiaries having other sources of prescription medication coverage (active workers, federal retirees, and those with coverage through the Veterans Administration or other private coverage); some beneficiaries opting not to participate in the Part D program; lower than expected enrollment in employer-sponsored retiree coverage, resulting in lower spending on the retiree drug subsidy portion of the program; and enrollment in Medicare Advantage plans rather than stand-alone prescription drug plans.

The slowing in growth of overall spending for prescription drugs is another factor contributing to the lower Part D costs. Between 1980 and the early 2000s, the average annual growth in total national drug spending was approximately 10%. Expectations were that the increase in spending would slow a bit, but relatively high rates were still anticipated. However, by 2010, the rate of growth in overall national drug spending was only 1.2%, much lower than anticipated.

“Drug prices are one of the most important factors in examining the Part D spending trend,” Dr. Hoadley states. Prices are influenced externally by global factors that influence price inflation and costs for new products; internally, Medicare drug plans can influence prices by negotiating retail prices and rebates from manufacturers, and using formulary decisions to encourage or require use of generics or less-expensive options.

The decade between 2000 and 2010 has seen a slowdown in the number of newly approved drugs; the total number of new brand drugs declined each year from 2006 to 2010, and average spending per new product decreased from $114 million per product in 2006 to $62 million in 2010. In addition, many of the drugs in the pipeline have been treatments for relatively rare medical conditions and thus inappropriate for the majority of Part D beneficiaries, or drugs with the same mechanism as existing products and, as such, often excluded from formularies or places in high cost-sharing tiers.

Finally, Dr. Hoadley states that the influx of patent expirations for frequently prescribed medications and the resulting increase in use of generic substitutes has been cited by the Medicare Trustees as a “key explanation for spending growth that has been lower than expected.” The trend for increased use of generics among Part D enrollees has been similar to that of the general population: the generic share of the market for Part D beneficiaries has increased from 60% in 2006 to 75% in 2010. According to the CBO, when a prescription is written for a drug available in generic and brand versions, “Medicare experiences 90% generic utilization.”

In conclusion, Dr. Hoadley notes that “policymakers should interpret with caution the implications of the Medicare Part D experience for future Medicare reform…The favorable spending trajectory may not be solely or even mainly attributable to the effects of competition as much as to larger trends in the pharmaceutical marketplace.”