A Decade of Success: How Competition Drives Savings in Medicare Part D

On December 8, 2003, then-president George W. Bush signed into law the Medicare Modernization Act (MMA). As part of the MMA, a new, voluntary prescription drug program called “Medicare Part D” was enacted. Beginning in 2006, Medicare enrollees would also be able to sign up for outpatient prescription drug coverage through private insurance companies, with premiums subsidized by Medicare. To date, seniors have expressed high levels of satisfaction with the program, and Part D expenditures have been more than 40 percent lower than initial government estimates—a rarity for a government health-care program.

Even though the program was controversial at the time of its launch in 2006, Part D is now often touted as a rare entitlement success story, with praise from both sides of the political aisle. 

In this report, we review data from the Centers for Medicare and Medicaid Services, the Congressional Budget Office, and other sources, to examine which factors—market competition, patent expirations, or other national trends (including private-sector innovations such as tiered formularies and preferred networks)—explain overestimates for Part D costs.

In our analysis, we find strong evidence that:

National trends are not a sufficient explanation for Part D’s success. 

Consumer-driven competition is a relatively new tool in the government’s effort to control health-care costs. 

Part D is an excellent model for future health-care and entitlement reforms. 

We also suggest additional reforms for Part D, including a “shared savings” program for participating plans that would encourage them to focus on chronic disease management and prevention, reducing Medicare spending in other parts of the program.