Medicare Compliance & Reimbursement

A 'centrally administered' Medicare drug program could be more cost-efficient.

Enlisting private insurers to provide Medicare drug coverage did more than confuse consumers--it also may have resulted in at least $332 billion in unnecessary Medicare drug costs and administrative expenses.

An add-on benefit to the traditional Medicare program that the government or a designated health plan would administer is a more cost efficient approach, proposes the Center for Economic and Policy Research in a recent study. To illustrate CEPR's claim, the study uses data from the Congressional Budget Office and other sources to project the potential savings for a "centrally administered" drug plan that's an add-on benefit to the existing Medicare plan.

Multiple Cost Scenarios Reveal Multiple Cost-Cutting Opportunities

In a high-cost scenario, in which a centrally administered Medicare drug program pays as much for drugs as the highest paying country, the program could save $332 billion during the 2006 through 2013 budget period. In the study's middle-cost scenario, it finds even greater savings potential--$563 billion when Medicare pays the same drug costs as the lowest paying country.

"The projected combined savings from lower drug costs and lower administrative fees are large enough in the middle-cost scenario to allow for the government to fully cover the projected cost of prescription drugs for Medicare beneficiaries over this budget window, and still leave a surplus of almost $40 billion compared with the projected spending under the [Medicare Modernization Act]," says CEPR. If benes weren't responsible for copayments and deductibles in addition to plan premiums, savings would be large enough to create $80 billion in savings ...quot; and eliminate $88.5 billion in "clawback" payments the MMA requires from states.

In addition, the study projects plan marketing and profits for the insurance industry to cost $38 billion over the same seven-year period. These costs wouldn't apply to a centrally administered plan. Instead, the federal government could reallocate these funds to other areas or create a more generous add-on benefit to the existing Medicare plan, suggests CEPR.

Competition Fails To Drive Down Costs

Congress didn't design Medicare Part D to maximize efficiency, rebukes CEPR. The principle that competition among private insurers would drive down drug costs resulted in special measures that guaranteed private insurers a substantial role in the new drug plan. These measures backfired, the center says. For instance, current law prohibits Medicare from negotiating drug prices directly with the pharmaceutical industry; CBO reported to Congress that Medicare would be unable to negotiate substantial savings in lieu of the price deals that private health plans could obtain. Private plans have so far failed to secure significant savings, whereas Medicare's enormous bargaining power could have led to lower prices, argues CEPR.

To view the full CEPR study, go to www.cepr.net/publications/efficient_medicare_2006_01.pdf.