When Congress enacted the Medicare Modernization Act of 2003 (MMA), it set a spending target of about $400 billion over 10 years for the Medicare Part D drug benefit, after accounting for revenues from premiums and other sources. Seven years into the program’s life, Medicare Part D spending is roughly 30 percent lower than projected.

For example, the Congressional Budget Office (CBO) in 2003 had projected that Medicare Part D would have a spending of $95 billion in 2011 and $105 billion in 2012. The Medicare Trustees, however, reported spending of $60 billion in 2011 and project spending to reach $61 billion in 2012.

This significant 30 percent variance between CBO’s original projection and actual spending presents serious implications for future budget decisions.  Since Congress must use CBO’s budget scoring for all legislation, wide over (or under) estimates of federal costs can adversely affect Congressional budget decisions, especially for Medicare, Medicaid, and health reform.

An interesting brief from the Kaiser Family Foundation looks at some of the factors that contributed to the discrepancy between the CBO’s projections and actual spending. A top researcher on Medicare and Part D issues, Dr. Jack Hoadley of the Georgetown University Health Policy Institute, wrote the brief. He found that many factors influenced Medicare’s prescription drug benefit spending, and that claims linking competing private Part D plans with lower spending may be overstated.

Among the factors Dr. Hoadley identified are:

  • Lower than projected Medicare Part D enrollment. An estimated 87 percent of all beneficiaries were expected to enroll in Part D. In 2012, the actual participation level was just 73 percent.
  • An overall trend of reduced spending on prescription drugs. The CBO in 2003 projected 12 percent average per-capita drug spending growth for 2006, while actual growth was just 10 percent. The CBO projected nine percent growth thereafter, but actual growth was only four percent.
  • Lower generic drug prices have balanced higher prices for patented brand-name drugs, leading to a flat pricing trend with slow to no growth.
  • Generic drug use has increased 14 percent between 2007 and 2010, with many prescription drug patent expirations since Part D launched.
  • Increased per-person drug utilization is in-line with projections.

A Global Trend in Generic Drug Use:

The rising of generic drugs is not only keeping drug spending down in the U.S. but also in countries around the world. A separate report, from the IMS Institute for Healthcare Informatics, found that expiring pharma patents could cut worldwide health care spending by $106 billion from 2012 to 2016.

See this post for more information about the IMS report: Global Use and Spending on Prescription Drugs and Biologics.