Senate Finance Committee Considers Proposals to Cut Wasteful Medicare Spending

The Medicare program is a bonanza of centralized economic planning, special-interest lobbying, pricing errors, perverse incentives, low-quality care, improper payments, and fraud. To paraphrase Lenny Bruce, Medicare is so corrupt, it’s thrilling. It is so corrupt, we at the Cato Institute just published a whole book – Overcharged – about how corrupt it is.* That book has a section called, “Medicare Part D: The Always-Pouring Pitcher of Drug Fraud.” Overcharged recounts how “the passage of Part D is associated with a large increase in the average launch price of oncology products.” It quotes Senate Finance Committee chairman Charles Grassley (R-IA) as saying, “It may be that some drug companies are taking advantage of government programs to maximize their market share.” (Gee, ya think?)

Today, the Senate Finance Committee will consider legislation that attempts to fix some of those problems by changing the way Medicare pays for certain prescription drugs. The specifics of the proposed changes are mind-numbingly complex. They have been known to cause health care wonks to scratch their heads and non-health care wonks to flee the room. If you want to read about the particulars in all their wonky glory, click here.  

The most significant changes regard Medicare Part D. Many of these changes would be beneficial. Two of them – a redesign of Part D “standard coverage” and a cap on subsidies to drug manufacturers – would save taxpayers a projected $85 billion over 10 years. Predictably, the people to whom that taxpayer money would otherwise flow are trying to block those savings. (See “special-interest lobbying,” above.) 

We begin with some background on Medicare Part D.

Background on Part D

In Part D, willing enrollees pay premiums to private health insurance companies to manage their drug coverage.

Medicare subsidizes those premiums, generally at an amount fixed at 74.5 percent of the average plan bid. The enrollee pays the remainder of the premium, which can vary based on generosity of coverage and other factors.

The insurers negotiate prices with drug companies and Medicare pays insurers additional amounts based on the quantity of drugs enrollees use and those negotiated prices.

Medicare requires participating insurers to offer a “standard coverage” plan, for which Congress rigidly defines enrollee deductibles and cost-sharing, as well as the rules for that second category of Medicare payments to plans.

Part D Coverage Redesign

The legislation would redesign and simplify the Part D benefit in three principal ways.  

First, it would eliminate enrollee cost-sharing above a specified amount. Under current law, responsibility for paying for an enrollee’s drug consumption changes as the enrollee’s total drug spending rises. But enrollees always pay for at least a portion of the cost. As depicted in Figure 1, enrollees pay 100 percent of the cost of their drugs up to $415. They then pay 25 percent of the cost of their drugs until their out-of-pocket spending reaches roughly $1,266. Then, they pay either 37 percent (generics) or 83.3 percent (brand drugs) until their total out-of-pocket spending reaches $5,100. (Here, federal law mandates a weird and temporary price reduction where we pretend the manufacturer is paying part of the price.) Beyond that point, enrollees pay 5 percent of the cost of their drugs, without limit. 

Source: CRS graphic based on Centers for Medicare & Medicaid Services data.


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