A model medicare program

THE fiscal standoff in Washington shows little movement toward compromise, and nowhere is the impasse more unyielding than it is on Medicare. Proposals for reducing Medicare spending are often couched in the form of price controls for example, capping the maximum price that Medicare pays for products such as prescription drugs.

Although on the surface price controls might seem logical, in practice they have multiple negative, unintended effects -including, ultimately, higher prices and worse health. There are better ways of reining in costs while also fostering the continued innovation that the U.S. healthcare system needs.

We certainly need to slow the growth of health-care costs, especially for Medicare. Fortunately, the program has an in- house model for how to do this: Part D, the Medicare drug benefit passed in 2003.

Part D gets high marks for controlling costs, protecting the elderly and driving the right kinds of health-care innovations. There is also much in the program that both the right and left can praise.

Conservatives like Part D because private plans bargain with drug companies over prices and then compete with one another for senior citizens' business. Lower premiums attract more enrollees, leading to more profits for insurers and lower costs for taxpayers. Competition and consumer choice help keep costs down. Part D has features liberals love as well. Coverage is subsidized so that the lower-income elderly pay little or nothing for drug coverage, and wealthier seniors pay somewhat more. Medicare also defines the standard benefit all plans must cover, so competition is focused on price, specific drug coverage and the convenience that pharmacy-network plans offer.

The result: Medicare Part D has cost more than 30 percent less than initially projected by the Congressional Budget Office in 2004 -- $304 billion compared with $449 billion.

Part D plans also control costs by making broad use of generics. In cases where a substitute to a brand name was available, the generic was dispensed almost 93 percent of the time. A 2010 CBO study estimated that generic substitution reduced Part D spending by $33 billion in 2007 ($24 billion of that savings accrued to taxpayers).

Part D premium costs to seniors have basically stayed flat in recent years, and the Centers for Medicare and Medicaid Services, the agency that oversees the program, predicts a 4 percent decline in premiums in 2014 as drug costs fall.

Independent and internal government surveys have found that satisfaction with Part D plans is generally high. For instance, a 2012 survey by KRC Research found that 60 percent of seniors were very satisfied with their coverage, and 30 percent were somewhat satisfied -- with only 10 percent reporting they weren't satisfied. Senior citizens on limited incomes and eligible for Medicaid also reported high satisfaction ratings. Eight out of 10 seniors reported that Part D plans cover the medicines they need.

Part D's emphasis on market pricing strikes the right balance between preserving affordability and spurring investment in pharmaceutical innovation. When patent protection expires for branded drugs, prices plummet and stay low. This allows society to reap far more of the benefits of medicines in the long term than they cost in the short term. Lipitor, which once cost dollars a day, is now pennies a day. Medicines for chronic illnesses can also prevent more expensive complications. Cheap statins, for instance, can prevent expensive heart attacks. Drugs, in other words, can substitute for much more expensive types of health-care labor and technology.