Mary Agnes Carey provides a helpful, concise summary of the major changes to Medicare Part D that the Obama Administration has proposed. They are controversial. Let’s look at what some of the research literature has to say about two of them.
Consider first, reductions in required coverage:
The proposal would remove special protections for some classes of drugs, which require insurers to provide access to the vast majority of drugs in that class.
In a 2009 Health Affairs article, Kevin Outterson and Aaron Kesselheim describe a variety of options for reducing drug costs to the Medicare program, including allowing Part D plans to tighten formularies, as proposed by the administration. (More by Kevin on Part D options here.) I’ve also examined this idea in a 2008 article in the Journal of Health Politics, Policy and Law.
CMS has given special protections to six classes of drugs, requiring that “all or substantially all drugs” in the classes be included in the formularies. This rule effectively eliminates Part D drug price negotiations over anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants. In other classes, Part D plans routinely exclude some drugs as part of the normal commercial formulary process. […]
These rules limit the negotiating power of Part D plans and make drugs in those classes more expensive. A Milliman study found that these six protected classes accounted for 16.8–33.2 percent of Part D drug costs by Part D plan administrators. Reversing this one rule would decrease prices in these classes by 9–11 percent, for a projected Part D savings of $511 million per year.
In a 2012 study published in Health Economics, Steven Pizer, Roger Feldman, and I went a step further and asked how much could be saved if Medicare adopted a drug program similar to that offered by the Department of Veterans Affairs. (Ungated working paper version here. My TIE post on the paper is here.) We computed the savings to the Medicare program and the loss of value (formally, consumer surplus) to beneficiaries due to tightening Part D formularies to the level found in the Veterans Health Administration (VA). The VA’s national formulary covers 59% of the top 200 drugs while Medicare PDPs cover between 68% and 93% of those drugs, averaging about 85% covered. So, if Medicare plans looked more like the VA, a lot fewer drugs would be covered.
But, the tighter the formulary (the less drugs it covers) the more bargaining leverage a plan has with respect to drug manufacturers. Plans able to restrict drugs from their formularies have the clout to say “no” to high prices. This is one, but not the only, reason the VA can purchase drugs at prices 40% below those paid by Medicare Part D plans. If Medicare drug plans restricted their formularies to the level of generosity offered by the VA and obtained VA-like drug prices by doing so, we estimate that the program would save $510 per beneficiary per year or a total of $14 billion per year (2009 prices).
However, in tightening formularies, beneficiaries would lose low-cost access to many drugs. That loss of choice is worth something, and it can be monetized using econometric techniques. Doing so, we estimate the loss of choice to be valued at $405 per beneficiary per year. Because the savings ($510 per beneficiary) exceeds the loss of value to beneficiaries ($405), they could, in principle, be made whole with $105 left over (= $510 – $405). This could be done by lowering premiums, for example.
Next, consider the administration’s proposal to limit the number of Part D plans offered.
CMS is proposing to allow insurers to offer no more than two prescription drug plans – one basic plan and one enhanced – in the same service area.
How could reduction in choice possibly be a good thing? Turns out, there’s a substantial literature on just this question. According to a 2012 Kaiser Family Foundation survey, 40% of seniors responded that the degree of multiplicity of plans was confusing and made it difficult to select the best plan. In a recent paper published in Health Affairs, Chao Zhou and Yuting Zhang summarize similar evidence for Medicare Part D.
Jason Abaluck and Jonathan Gruber [ungated working paper version here] observed that Part D enrollees had difficulty making their initial plan choices when Part D started in 2006. They found that beneficiaries paid more attention to plan premiums than to their own total out-of-pocket health expenses. Florian Heiss and colleagues, using 2007 and 2008 Medicare Part D data to study plan choices, found that fewer than 10 percent of consumers enrolled in the least costly plans in 2007 and 2008 and that beneficiaries could save on average about $300 per year if they switched plans. [Links added.]
Zhou and Zhang also found that only about 5% of beneficiaries chose the least expensive plan available in 2009, and seniors overspent by an average of $368 in that year. Interestingly, they also found that beneficiaries with cognitive difficulty chose cheaper plans, perhaps because such beneficiaries receive assistance from caregivers. In a recent follow-up to their earlier work, Jason Abaluck and Jonathan Gruber found that the suboptimality of choices by beneficiaries was persistent over time. However, in contrast, Jonathan Ketcham and colleagues (ungated working paper version here), found that after one year of experience with the program, beneficiaries did reduce their overspending.
In conclusion, though they are resisted by some stakeholders, there is evidence that reduction in formulary generosity and number of plan options could do more good than harm for beneficiaries, in general.