The Affordable Care Act (ACA) will undoubtedly reduce seniors’ access to care. A huge chunk of the funding for ObamaCare is derived from cutting $716 billion from the Medicare program over the next decade. For instance, one provision cuts the fees paid to physicians who treat Medicare enrollees by 25 percent. Another provision — the Independent Payment Advisory Board — will have the power to slow Medicare spending by curtailing increases in Medicare provider payments. A third strike reduces funding for Medicare Advantage (MA) plans, which cover one-quarter of Medicare beneficiaries. Compared to traditional Medicare, MA plans provide approximately $825 annually in added benefits to (mostly) moderate-income enrollees.
In early January the Obama administration announced yet another attack on seniors’ pocketbooks. The Centers for Medicare and Medicaid Services (CMS) wants to block seniors from choosing Medicare Part D drug plans that offer lower premiums (and lower co-pays) in return for patronizing a preferred pharmacy network.
Reducing Seniors’ Choices. Since its inception, the Medicare Modernization Act of 2003 (MMA) mandated a statutory, non-interference clause. The MMA specifically blocked Medicare from taking sides in the negotiation process (i.e. interfering) between the plans and plan vendors. Contract negotiations between drug makers, pharmacy networks and drug plan sponsors were strictly left to the respective parties. However, some Medicare administrators remain skeptical of provisions in the MMA prohibiting it from interfering in the negotiation process — something the MMA explicitly prohibits.
The MMA was passed by the Bush administration with the help of congressional Democrats. The Bush administration wanted the Medicare drug program to be composed of private drug plans, whose primary mission is to vigorously compete for seniors’ patronage. Part D drug plans are free to use a variety of techniques to control drug costs: including preferred-drug lists, tiered formularies, use of mail-order drug suppliers, negotiated prices with drug companies and drug distributors, and contracting with exclusive preferred pharmacy network providers.
Medicare Part D drug plans have increasingly adopted preferred pharmacy networks as leverage to negotiate lower drug prices for seniors. An estimated 75 percent of seniors in Part D “stand-alone” plans are in a plan that features a preferred pharmacy network — nearly 14 million people.
As part of the negotiation process, pharmacy networks compete to become one of the exclusive network drug providers. When drug plans create preferred pharmacy networks they negotiate for the lowest possible prices. Negotiated prices are the result of bargaining power — the ability of the drug plan to deny business to a firm if their bid isn’t favorable. However, the Obama administration wants to prevent drug plans from excluding the losing bidders from participating in a drug plan if the losing bidders are willing to abide by the contract terms of the winning (pharmacy network) bidder. Thus, the incentive will be to bid high knowing a losing bid will boost the prices seniors (and their drug plans) pay, without reducing the number of customers walking through the door. Medicare’s reasoning is that preferred pharmacy networks must cost taxpayers more — despite CMS’s own research that found preferred networks lower taxpayer costs three-fourths of the time. Go figure!
How Medicare Part D Works. Seniors participating in Medicare Part D pay about one-quarter of the cost for their drug plan, while the government subsidizes about three-quarters of the cost. Seniors have a wide range of plans to choose from. Nationwide, 1,169 Part D plans compete in 34 regions for seniors’ business. The actual number of plans any given senior has access to varies from a low of 28 in Alaska to a high of 39 Pennsylvania and West Virginia. Seniors can choose from plans that feature low premiums but more cost-sharing, or they can choose a more expensive plan that has little out-of-pocket costs. The least expensive plan is $15 per month, although most seniors choose plans costing more than double that amount. The average monthly premium for the plans chosen by seniors is about $38.
By virtually all measures, the program has been a great success. Seniors’ satisfaction rates average about 90 percent to 95 percent. Though subsidized by Medicare, the premiums seniors pay are a function of the plan they choose — and ultimately of total program expenditures. Premiums have remained affordable because drug spending per member has been far lower than projected:
- Nearly a decade ago the Medicare Trustees projected a per capita benefits cost of $1,971 in 2006, rising to $3,047 by 2013.
- But the actual per capita cost in 2013 was only $1,846 — a savings per enrollee of nearly 40 percent.
Indeed, back in 2006, the Social Security and Medicare Trustees projected the program to cost about $127 billion by 2013 — eight years later. Yet the cost in 2013 was far less — only about $72 billion. [See the figure.]
Conclusion. Vigorous competition among numerous competing plans is the primary reason given why Medicare Part D has come in under budget and held seniors’ drug plan premiums in check. Seniors select a plan that best meets their needs, so plan sponsors are constantly looking for ways to earn seniors’ patronage. Seniors seem to appreciate lower priced preferred pharmacy networks. These plans are among the most popular among seniors. An estimated 75 percent of seniors in Part D “stand alone” plans are enrolled in a drug plan that features a preferred pharmacy network. That’s a huge jump from 2013 when only about 43 percent were in such a plan. All told, nearly 14 million seniors with Medicare Part D will lose the plan they currently have if preferred networks are banned for 2015. Nearly 14 million seniors will be forced to find another drug plan if preferred network plans are banned from the Medicare Part D marketplace. As a result, the losers will be seniors — and taxpayers.