Medicare's Slowdown: A Story About Part D

In a Health Affairs blog post, CRFB's Loren Adler and Adam Rosenberg find that most of the recent slowdown in Medicare's costs is attributable to the prescription drug benefit, Part D, and cautions that this might not bode well for the slowdown's permanence.

In looking at changes in CBO's Medicare projections since March 2011, and building on work we did previously, they note that 60 percent of the slowdown in Medicare benefits (excluding sequestration) has taken place in Part D. More specifically, Part D spending was revised down by $225 billion over ten years, while Parts A and B are $145 billion lower. The sequester accounts for another $75 billion, and increased recoveries of improper payments are another $85 billion.

The fact that the slowdown has disproportionately taken place in Part D does not bode well for the prospect of a large permanent Medicare slowdown.

While the Medicare spending slowdown is excellent news for beneficiaries and the budget, the fact that Part D is responsible for such an outsized share of the slowdown is reason to be cautious about its permanence. Lower Part D spending primarily stems from the “patent cliff” — a number of blockbuster brand-name drugs that have lost patent protection, paving the way for cheaper generic competitors — and a decrease in the rate of introduction of new brand-name drugs. It is unclear whether these trends in the prescription drug market will continue or are a temporary phenomenon — with the recent rise of specialty drugs, highlighted by the $1,000/pill Hepatitis C treatment Sovaldi, the tide may already be shifting. Moreover, it is unclear that a permanent Rx drug technological slowdown would be a positive development, even if it meant lower costs.

Still, they write, the Part A and B slowdown has been encouraging, since it is less likely to be related to temporary factors.

The primary analysis on the topic from CBO, in fact, found that only one-eighth of the slowdown in Parts A and B from 2007-2010 could be explained by factors related to the economy – and not through the usual channel of utilization impacts that take place in the private market. Rather, economic factors influenced spending by directly impacting automatic payment updates for many Medicare services that are tied to prices. In addition, more beneficiaries at each age enrolled only in Part A, likely because many older Americans were forced to remain in the workforce longer.

Another one-eighth of the slower spending growth in Parts A and B from 2007-2010 was due to a beneficiary pool whose average age was decreasing because of the influx of baby boomers, plus the increased use of prescription drugs (which studies have shown decreases spending on medical services and items besides drugs). CBO cannot explain the remaining three-quarters of the slowdown, lending evidence to the argument that some structural changes might be playing a role, although there is still much uncertainty.

The uncertainty about the slowdown and the disproportionate effect of the prescription drug technological slowdown and patent cliff on Medicare spending lead the authors to be cautious about whether Medicare spending growth will continue to be subdued. As he writes:

The decrease in Medicare spending growth has already been a remarkable shift, and prolonging the slowdown in Parts A and B would be a tremendously important contribution. Unfortunately, though, the outsized role that Part D has played in the Medicare slowdown is bad budget news because it may prove fleeting.

Click here to read the full blog post.