News Release

Projected Medicare Part D Costs Drop By 30 Percent

$96 billion Reduction Due to Competition and Lower Prescription Drug Plan Bids; Average National Monthly Premium Declines to $22

Independent estimates for the Medicare Part D prescription drug benefit for the FY 2008 budget cycle show that net Medicare costs are 30 percent less -- $189 billion lower -- than were originally predicted when the benefit was created in 2003, HHS Secretary Mike Leavitt announced today. In addition, based on strong, competitive bids by health care plans for 2007, average monthly premiums will be approximately $22 for beneficiaries, down from $23 in 2006, if enrollees remain in their current plans. The initial estimate for 2006 premiums was $37.

"Our new estimates provide clear evidence that consumer choice is working," Secretary Leavitt said. "Government interference will result in fewer choices and less consumer satisfaction. Actuaries have told us that government interference will not lead to lower drug prices either."

According to actuaries with the Centers for Medicare & Medicaid Services (CMS), the updated Medicare Part D baseline of payments to Part D plans for the FY 2008 budget cycle has decreased from last summer’s mid-session review numbers by $113 billion over the next ten years (2007 - 2016). Importantly, of the $113 billion reduction, $96 billion is a direct result of competition and significantly lower Part D bids.

"Part D drug plans produced greater-than-expected savings by competing for Medicare beneficiaries and aggressively negotiating with drug companies," said Acting CMS Administrator Leslie V. Norwalk. "Strong, competitive bids and informed beneficiary choices are bringing down premiums yet again. The bottom line from the news today is that beneficiaries are paying less in premiums and taxpayers are seeing billions of dollars in savings."

In addition to the $96 billion reduction -- due to substantially reducing their bids in 2007 in an effort to compete with rival plans -- there are two other factors that lowered the estimated cost of Part D payments to plans: lower growth in drug costs in general, and lower enrollment than originally expected.

Lower actual growth in drug costs in 2005, compared to last summer’s mid-session review estimates, resulted in an approximate $13 billion reduction in the new baseline. The reduced Part D cost estimates reflect lower actual growth in drug costs than had been expected, with a single-digit percentage increase (5 percent in 2005) observed for only the second time in more than a decade. Relatively slow growth in actual drug prices and costs, compared to past trends, is expected to persist over the next few years, as more generic drugs become available and aggressive steps to keep down drug costs continue.

Lower-than-anticipated enrollment in Part D reduced the new Medicare Part D payments to Part D plans by $20 billion when compared to last summer’s mid-session review figures. As the CMS actuaries discovered, many Medicare beneficiaries had creditable prescription drug coverage from other sources (such as FEHB, Tricare, and the VA), and did not need to sign up for what would have been duplicative coverage under Part D.

The new baseline numbers also reflect an increase of $16 billion due to updated figures from the 2002 to the 2003 Medicare Current Beneficiary Survey.

"In addition to this huge savings as a result of drug plan competition, it is important to note that beneficiaries are saving more as well by overwhelmingly selecting less-costly drug plans for themselves," said Norwalk. "The average monthly Part D premium in 2006 for the standard benefit package would have been about $32 if beneficiaries had enrolled in plans randomly, without a preference for the lower-cost, lower-premium plans. Instead, enrollees actually paid premiums that averaged about $23 in 2006, reflecting their choice of more efficient plans with lower premiums." The actuaries note that this pattern is expected to occur again in 2007, as beneficiaries opt for the best bargains among competing plans, and should further lower the average monthly premium.

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Last revised: January 12, 2009