Saving Money through Innovation

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  • 11/04/2014

Improved Access to Medical Innovation Slows Medicare Spending

By: Peter J. Pitts

Recently the outlook for spending on federal health programs has been improving. While many have been quick to attribute the slowdown in the growth of spending to the Affordable Care Act, the data suggest improved access to prescription medications is the real hero.

The trustees of Social Security and Medicare recently reported that Medicare should have enough money in its trust through 2030, which is 13 years longer than they projected in 2009. Meanwhile the Congressional Budget Office (CBO) projected last month that federal spending on health programs in 2039 would equal 8.0 percent of gross domestic products (GDP), which is about 15 percent less than was projected in 2010.

Comparison of CBO's 2010 and 2014 Projections of Net Federal Spending for Health Care Under the Extended Baseline

Source: Congressional Budget Office

While some policymakers and journalists might conclude that the Affordable Care Act (ACA) of 2010 is responsible, evidence of the decline actually predates the bill’s implementation. From 2000 to 2005, the annual growth in spending per Medicare beneficiary was 7.1 percent. But from 2007 to 2010, that rate dropped to 3.8 percent.

What changed between 2005 and 2007 was the introduction of Medicare Part D, which increased access and reduced the cost of prescription medications for millions of eligible Americans. As a result, prescriptions filled by Medicare beneficiaries jumped 14 percent in 2007.

In 2012, the CBO found that this increased use of medications was lowering Medicare’s spending on hospital and physician services. For every 1 percent increase in prescriptions filled by Medicare beneficiaries, spending on medical services dropped by about 0.2 percent, according to the agency.

The main driver of the decline in health care spending is increased access to prescription medications

A more recent analysis found that Medicare Part D reduced hospitalizations by 8 percent and saved the government about $1.5 billion during the program’s first four years. And Medicare Part D is costing less than expected, which is also contributing to the slowdown in health spending.

The main driver of the decline in health care spending is increased access to prescription medications. The health care system is using medication to control illnesses, and it’s replacing expensive hospitalizations, nursing homes and other medical services.

Medicare Part D provides prescription medication coverage for 35 million seniors through private insurers. Seniors pay low monthly premiums of $30 on average for their coverage and 90 percent said they felt satisfied with their prescription medication coverage in a recent survey. Not only is the program providing a valuable service, it is also costing 45 percent—or $348 billion—less than the original estimates — and with a more than 90 percent customer satisfaction.

The program works well because Part D medication prices are determined through negations between private insurers and manufacturers. The savings are realized because market competition effectively drives down the costs, and these savings are passed on to beneficiaries in the form of lower premiums.

Some government officials have proposed that the government should interfere with the program’s success by imposing new rebates on Part D medications. Such rebates, however, would reduce the savings from the program, increasing prices for Medicare Part D beneficiaries by up to 40 percent. The CBO has stated that government interference with the Part D negotiations between insurers and manufacturers would have a “negligible effect.” Precious few programs in Washington deliver both savings to the taxpayer and results to beneficiaries. On both counts, Medicare Part D succeeds. There isn’t a better model to recommend market-driven approaches to health care.

In contrast, the U.S. Department of Veteran Affairs (VA) negotiates its own medication prices with manufacturers but excludes many newer therapies as a result. About 38 percent of drugs approved in the 1990s and 19 percent of the drugs approved since 2000 are not covered under the VA formulary, impacting the overall life expectancy of veterans. As a result, 40 percent of veterans with VA benefits choose to enroll in Medicare Part D instead.

While Medicare beneficiaries have affordable access to life-saving medicines, those enrolled in health insurance plans through the exchanges established by the ACA might not, thanks to specialty tier drug pricing.

Based on the CBO findings, it is abundantly clear, that medical innovation plays a critical role in the solution to curve health spending in the United States. Affordable access to life-saving therapies and continued support through pro-patient and pro-innovation policies are essential to improving patient lives, health care and the economy.


Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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