What is the Status of the Medicare Part D Program After Six Years?

The Medicare Part D program is doing quite well after six years, but there are definite challenges ahead. Part D costs are considerably lower than projected, in part due to lower than projected enrollment levels and drug costs. Medicare beneficiaries also continue to benefit from robust competition and the lowering of their drug costs while in the “donut hole.”

Projected vs. Actual Spending

The Part D program costs have run considerably below the original projections from the Congressional Budget Office (CBO) during consideration of the Medicare Modernization Act of 2003 (MMA). For example, a Kaiser Family Foundation (KFF) Medicare Policy May 2012 Issue Brief on Medicare Part D spending trends, sets forth the CBO spending projections for 2006, 2009, and 2012, and actual spending, according to the 2012 Medicare Trustees Report:

  • projected spending for 2006 was $53 billion – actual spending was $39 billion (26 percent less);
  • projected spending for 2009 was $79 billion – actual spending was $52 billion (34 percent less); and
  • projected spending for 2012 was $105 billion – actual spending will be $61 billion (42 percent less).

Factors Contributing to Lower Costs

According to the KFF’s May 2012 Issue Brief, some of the factors contributing to lower costs are: (1) robust competition between plans; (2) reduced drug costs thru the entry of generics; (3) fewer brand name drugs being approved by FDA; (4) manufacturer rebates exceeding expectations; (5) slower growth in drug prices than predicted; and (6) lower plan enrollment then anticipated.


It is difficult to quantify the effects of competition due to inaccessibility of the private proprietary information of Part D plans. However, KFF’s October 2011 Data Spotlight on Medicare Part D indicates that nationally there are over a thousand prescription drug plans (1041 in 2012 – down from 1875 in 2007) and the average beneficiary has 31 different plans to choose from. KFF attributes the decrease in total plans to the merger of plans and plans with low enrollment dropping out of the program.

Greater Use of Generics

The increased use of generic drugs is a factor in lower program costs. For example, the KKF May 2012 Issue Brief on Part D spending trends,  indicates that generic use as a share of the market grew from 60 percent in 2006 to 75 percent in 2010. The CBO reports a 90 percent generic utilization when a prescription is written for a drug available in both brand and generic version. And since the cost of the average generic drug is 25 percent below the cost of a brand name version, the savings are enormous. The lower prices due to generic substitution also have offset the higher cost of brand name drugs still under patent protection, according to the KFF brief.

According to the KFF, the other factors contributing to lower program costs include the following:

  • Lower than projected growth in drug spending. In 2003, CBO projected 12 percent growth in drug spending until 2006 and then 9 percent thereafter. Actual growth was 10 percent until 2006 and it has been 4 percent since 2006.
  • Actual enrollment in Part D plans is lower than projected. The CBO projected that 87 percent of Medicare eligible beneficiaries would be enrolled in a Part D plan by 2012 but actual enrollment in 2012 is only 73 percent.
  • Part D manufacturer drug rebates have been higher than expected. This private data is proprietary information so it is hard to quantify, but the 2012 Medicare Trustees Report seems to indicate that rebates have exceeded expectations. Nevertheless, Part D rebates continue to be lower than Medicaid rebates (where the rebates have mandatory minimums).
  • Fewer drugs on patent protection. The initial implementation of the Part D program corresponded with numerous drugs coming off patent protection and since then fewer new drugs have been approved by FDA.

Benefits to Enrollees

While premiums are up a little every year, consumers are benefiting from the reduction in their costs while in the donut hole via the (1) Coverage Gap Discount Program (which requires participating manufacturers to provide a 50 percent discount on drugs purchased by beneficiaries while in the donut hole) and (2) provisions lowering enrollee costs while in the donut hole. Both of these programs were part of the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148).

Under these programs, in 2011, beneficiaries received a 50 percent discount on brand-name drugs while in the donut hole and 7 percent coverage on generic drugs. In 2012, this generic drug coverage increased to 14 percent in the donut hole. By 2020, generic and brand-name drugs in the donut hole will be covered at 75 percent.

However, also under PPACA, starting in 2012, higher income beneficiaries have had to pay a surcharge on their monthly premiums. The income threshold for the surcharge begins at $85,000 for an individual and $170,000 for a couple. In 2012, according to the CMS Office of the Actuary, this surcharge affects only 3 percent of enrollees. The income thresholds, however, are fixed by law through 2019, which will result in a higher percentage of beneficiaries falling in this category each year. In fact, by 2020, CMS estimates that 8 percent of beneficiaries will be paying an income-related surcharge. The premium surcharge ranges between 35 percent and 80 percent based on income level.

More of this means-testing of enrollees may be necessary to keep program costs contained. In fact, KFF reports in its February 2012 Issue Brief some of the recent proposals by House Republicans and the Obama Administration to modify these income related premiums, including: (1) freezing the current income thresholds until 25 percent of beneficiaries pay the surcharge; (2) increasing the surcharge by 15 percent; and (3) lowering the initial income threshold from $85,000 to $80,000 and from $170,000 to $160,000.

What Challenges Does the Part D Program Face?

The main challenge of Part D, as with all federal entitlements, is cost-containment. The leading edge of the baby boomers reached Medicare age in 2010. According to AARP, approximately 7,000 people hit Medicare age every day. There are presently 45 million Part D enrollees. By 2030, there could be as many as 70 million Part D enrollees.

In addition to more stringent means-testing of Medicare Part D beneficiaries, two other possible cost-containment solutions for Part D include: (1) aligning Part D drug costs with Medicaid drug costs, and (2) controlling the cost of biological products. These solutions are more fully discussed in the KFF May 2012 Issue Brief on prescription drug procurement.

Aligning Part D Drug Costs with Medicaid Drug Costs

Before Part D, Medicare beneficiaries eligible for Medicaid paid the Medicaid price (i.e., the best private price or 23.1 percent below the average manufacturer price (AMP)). With the advent of Part D, however, these dual eligibles fell under the newly-created Part D low-income subsidy (LIS) program, which charges the LIS-eligible beneficiary no premium and a very modest cost-sharing amount. As pointed out by KFF, under the Part D LIS program, the drug prices are much higher due to lower rebates than available in the Medicaid program. Since Part D LIS beneficiaries make up 36 percent of all Part D enrollees, this solution, if implemented, is estimated by CBO to potentially save $10 billion per year.

Controlling the Costs of Biological Products

The cost of brand-name biological products has been address by PPACA, which created a program that accelerates the introduction and approval of biosimilars (biologic generics) by the FDA. This is important as the CBO estimates biosimilar prices to be 40 percent lower than brand name biologics.

However, under PPACA, the patent exclusivity period for biological products was set at 12 years, which will allow biologics a long period of protection. The Obama Administration recently proposed a reduction of this biologic patent exclusivity period from 12 to 7 years in its Fiscal Year 2013 Budget. If this were done, the OMB predicts this could save the Part D program $3.8B over 10 years.

Another proposed solution discussed by KFF would be to allow the government to negotiate the prices of biological agents when Medicare is the major purchaser, i.e., allow price controls on new biologics that are used predominantly by Medicare beneficiaries through Parts B and D.