Medicare Part D: D for Doomed?

New drug coverage plans cost more money and serve fewer patients than the government expected. What if things get worse? Two scenarios for disaster.
May 01, 2006

The early warning signs are clear.

Implementing the Medicare Modernization Act (MMA) is not proceeding as smoothly as many expected. The government appears to have severely underestimated its expenses, and Part D will likely far outstrip all original cost projections. At the same time, seniors are staying on the sidelines. Enrollment remains far below expectations. Almost as troubling as the lack of patients: a surplus of Part D plans. The vast array of coverage packages seems to have confused many potential beneficiaries.

More plans with lower enrollment per plan have cut the bargaining power—and perhaps the profitability—of individual plans.

A recent Wall Street Journal/Harris Online survey showed that only one in five respondents 65 and older believe the program will make prescription drugs more affordable, while fewer than half said they are likely to sign up for the program. And although enrollment has picked up lately, the latest figures still suggest that only 5.4 million of the 22 million remaining beneficiaries have enrolled voluntarily in a Medicare drug plan or a Medicare Advantage plan, according to the Associated Press.

Under the Influence: What Shapes Part D?
Costs are already escalating, mostly because of implementation problems. A February 2006 report by the Kaiser Family Foundation found that 37 state governments have been forced to guarantee or pay for drug coverage for "dual eligibles" not yet covered by Part D programs.

Beneficiary dissatisfaction has ignited political blowback. Congress fears resentments from senior citizens, so political factors are likely to shape government reaction to cost over-runs and beneficiary discontent. Budgets are tight in Washington. War costs billions each year, and billions more must be found for hurricane relief. Part D is a Republican program. If things go badly for the Republicans, might the Democrats gain control of either the House or the Senate in 2006? Or the White House in 2008?

Each of these variables is important in its own right, but beneficiary enrollment and program costs are the most critical. Beneficiary enrollment determines the number of health plans that will survive in the market. At the same time, the cost of Medicare Part D drives the political debate—and the policy options—that will determine the future of the program. What happens if enrollment remains low, or if costs spiral out of control?

Let us examine two hypothetical scenarios about how the Medicare Part D market may evolve. These are based on historical precedent—in particular, the experience of other government health insurance programs—as well as the available evidence of current beneficiary attitudes toward the program. These scenarios are not intended to forecast or predict how the Part D marketplace will evolve. Instead, they are meant as plausible, realistic scenarios to illuminate the key market drivers, their impact on the Part D market, and implications for the pharmaceutical industry.

Scenario #1

Low voluntary enrollment does not mitigate financial risk. Due to confusion about the program and widespread implementation challenges, voluntary enrollment falls significantly below expectations. A disproportionate share of the enrollees come from the high-cost, dual-eligible population, whose members are automatically enrolled in Part D plans by state Medicaid programs. With enrollment low, many Medicare Advantage Prescription Drug Plans (MA-PDs) and Prescription Drug Plans (PDPs) are unable to sign up enough beneficiaries to manage risk and earn a reasonable profit—even with government subsidies. Many plans leave the market, and the federal government is forced to rely on fallback plans in some regions. In other regions, beneficiaries find themselves with extremely limited plan options. Dissatisfied with their choices, beneficiaries drop out, and voluntary enrollment rates decline further.

The low enrollment rate leads opponents of privately administered approaches to Medicare prescription drug coverage to advocate for a centralized, government-run system. In an attempt to appeal to the powerful senior-citizen voting bloc in advance of the 2006 and 2008 elections, politicians from both parties agree to major reforms to centralize control of Medicare Part D, streamline its cost structure, and ensure availability of resources and benefits to enrolled beneficiaries. Reforms eventually result in decisions, such as the adoption of one national formulary, to decrease the prescription drug program expenditures and, hopefully, encourage beneficiary enrollment.

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