Medicare savings the Obama budget plan overlooks

Pharmacist by

Sometimes patients forget to take their meds or choose to skip doses to save a little money. If this sounds like only a casual oversight, a small inconvenience, or an unfortunate personal cost-cutting measure, think again. There are real health and economic consequences when patients don't take their medications as prescribed. In fact, the aggregate health care cost from non-adherence in the United States is estimated to exceed $100 billion. Over a decade, that equates to more than $1 trillion in unnecessary medical spending for patients, private insurance, and government health programs. To put this in perspective, Medicare Part D expenditures on prescription drugs in the coming decade will also reach about $1 trillion. In other words, the cost of people not taking their drugs will rival the federal government's spending on prescription medicines for seniors.

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This is an ideal area to target in the pursuit of Medicare savings. The Congressional Budget Office has recently acknowledged that increased drug utilization is associated with decreased spending elsewhere in the health care sector. And there are successful methods for improving drug adherence that could be expanded. For example, many high-quality Medicare Advantage plans have begun to more carefully monitor the timing of patient refills and have established programs where patients receive reminders to refill prescriptions for chronic conditions. The newly establish Accountable Care Organization (ACO) model that ties provider reimbursement to quality of care and reductions in total cost also creates an incentive to ensure that patients within an ACO take their drugs on schedule.

Patient-oriented strategies have also been shown to be effective but are generally absent from the Medicare program. "Carrot and stick" approaches-such as lower co-pays for essential drugs and higher co-pays for low-value services-can lead patients toward better drug adherence when it matters most. Dr. Mark Fendrick of the University of Michigan testified recently to the House Ways and Means Committee on the broader topic of strategies to improve Medicare's benefit designs, noting that "traditional Medicare is constrained by a set of rules and laws that allow little flexibility to implement clinically-driven, value enhancing strategies."

One of the most important value enhancing strategies will be to tackle poor medication adherence. But President Obama's newly released fiscal year 2014 budget takes a pass on capturing these potential savings, instead seeking $123 billion in Medicare savings over the coming decade from price-setting strategies for the pharmaceutical industry that will do nothing to improve care.

The President's proposal--the single largest savings proposal in the Department of Health and Human Services' budget--would "allow Medicare to benefit from the same rebates that Medicaid receives for brand name and generic drugs provided to beneficiaries who receive the Part D Low-Income Subsidy, beginning in 2014. The proposal would require manufacturers to pay the difference between rebate levels they already provide Part D plans and the Medicaid rebate levels."

Some may ask, shouldn't drug companies pay the same rebate in Medicare as in Medicaid? Doesn't the government deserve the best price they can find? As tempting as this logic may be, the answer is no. Drug rebates have been shown to operate just like taxes, and drug companies will respond to rebates as they would to a tax-by shifting costs to others to the extent possible. As drug costs may be one reason for patients to avoid taking their medicines, this shift could have the perverse effect of actually worsening adherence.

By focusing on the price of drugs and not incentives for adherence, the President's budget reflects a classic Democratic maneuver: reject the free market's ability to improve government programs and instead seek more federal interventions to fix the problems inherent in them. It is not surprising that Democrats would pursue a strong-armed approach to Medicare Part D, as they overwhelmingly opposed it as too market-based when it was created in 2003. But they would do well to learn from history and think twice about interfering with the market-based benefits Part D enjoys: Due in part to intense competition between private prescription drug plans that offer coverage to seniors and in part to the proliferation of lower-cost generic drugs, Medicare Part D has proven far less costly than originally expected-35 percent less than projected, to be precise.

There are many important drivers behind the rise in health care spending in the United States, and everyone has a role to play-patients, providers, and payers-in seeking strategies to bend the cost curve. Poor adherence to medication is a prime example. Improving adherence by 10 percent could save the federal government $100 billion in the coming decade. While this is clearly not enough to solve the entitlement challenges we face, it is a significant and obvious start. But instead of aggressively seeking strategies to improve proper drug utilization and realize these savings, the President risks tampering with a well-functioning program and introducing a policy that could actually further reduce adherence.

Alex Brill is a research fellow at the American Enterprise Institute, served as an adviser on tax policy to the President's Fiscal Commission, and is a former senior adviser and chief economist to the House Ways and Means Committee. 

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About the Author


  • Alex Brill is a research fellow at the American Enterprise Institute (AEI), where he studies the impact of tax policy on the US economy as well as the fiscal, economic, and political consequences of tax, budget, health care, retirement security, and trade policies. He also works on health care reform, pharmaceutical spending and drug innovation, and unemployment insurance reform. Brill is the author of a pro-growth proposal to reduce the corporate tax rate to 25 percent, and “The Real Tax Burden: More than Dollars and Cents” (2011), coauthored with Alan D. Viard. He has testified numerous times before Congress on tax policy, labor markets and unemployment insurance, Social Security reform, fiscal stimulus, the manufacturing sector, and biologic drug competition.

    Before joining AEI, Brill served as the policy director and chief economist of the House Ways and Means Committee. Previously, he served on the staff of the White House Council of Economic Advisers. He has also served on the staff of the President's Fiscal Commission (Simpson-Bowles) and the Republican Platform Committee (2008).

    Brill has an M.A. in mathematical finance from Boston University and a B.A. in economics from Tufts University.

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