How Bitter of a Pill is Medicare Part D to Swallow?

Although it's usually fun to write about the public policy topic du jour (e.g., Greece's economy, net neutrality), sometimes it's nice to go off into the more obscure aspects of public policy, such as the wonderful world of Medicare Part D. What even put me in this line of thinking in the first place was a working paper from the Federal Reserve Bank of San Francisco [FRBSF] (Dunn and Hale, 2015) that tries to show that between 19,000 and 27,000 lives were saved thanks to Medicare Part D.

Before even attempting to delve further, we should ask ourselves what Medicare Part D is. Medicare Part D, also known as Medicare Prescription Drug Coverage (enacted in 2003), is the United States federal government's way of subsidizing the costs of prescription drugs for Medicare beneficiaries.

How much does such a program cost the American people? Looking at the Medicare Trustees report, the most recent of which was released back in August, shows that about $70B was spent on Medicare Part D in 2013 (p. 101). This amount currently makes up 0.44 percent of overall GDP, and will increase to 1 percent of the overall GDP by 2050 (p. 115). By 2020, we are expected to pay $134.1B on Medicare Part D (p. 109).

One thing that has the potential to irk me about Part D is that Medicare fraud on the whole is a major issue. Medicare has been on the Government Accountability Office's (GAO) high risk list since 1990, and the GAO has finally given some attention to Part D in the context of fraud. The actual sticker price of Part D, the increased amount of cost-sharing since the implementation of Part D, and the money lost in fraud are one thing, but something else bothers me about the Federal Reserve study, and that's not addressing the idea of the crowding-out effect.

In economic theory, crowding out essentially means the government spends money that would have been otherwise spent in the private sector without government intervention. This is important because if the crowding out effect is high, the cost-benefit analysis (CBA) is altered significantly in terms of efficiency. Jonathan Gruber, the economist of Obamacare fame, actually co-authored a paper (Engelhardt and Gruber, 2010) and used a timeline with considerable overlap of the FRBSF paper. Their findings ended up being that the crowding-out effect was at 80 percent, which is to say that Part D extends prescription coverage to one senior citizen for the price of five.

Taking a look at Figure 1 from the FRBSF study (see above), there not only was there a downward trend in a decline of the cardiovascular mortality rate (which is an important distinction to make since half of Part D expenditures go to cardiovascular-related prescriptions), but it was actually a steeper decline prior to Part D being implemented in 2006. Looking at this correlation, not only do I question the FRBSF's theory, but one could argue that Part D actually slowed down the mortality rate decrease, i.e., crowding out at such a level overstates the benefits in the FRBSF paper.

Even in spite of Part D's flaws, what makes Part D more successful than the rest of Medicare is that it is a voluntary drug benefit program that delivers benefits through stand-alone drug prescription programs, and has come well under budget (see CBO report here). Even if the subsidies are coming from the government, Part D has done a better job of cost containment than the rest of Medicare. Why? In a word: competition. When you encourage competition, even with taxpayer dollars, it has this uncanny ability of making goods and services better.

Tampering with health care in such a manner is not as simple as fine-tuning an engine. Marketplaces work more like intertwined ecosystems. While I would like for a liberalized health care market to be implemented, I know that the government is not going to stop intervening anytime soon (we have Obamacare, remember?), which is why Part D is preferable to some of Medicare's more interventionist approaches. Heavy-handed price regulation is not the key to healthcare success; competition is (Howard and Feyman, 2013), and until there is enough of a societal change in which both the people and its politicians realize that a more liberalized health care market is a better-functioning health care market, competition in Medicare is a facet we should continue to strive for in United States health care policy.