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How Choice and Competition Are Slowing the Rise in US Health Care Costs

How to explain the slowdown in US health care spending? The more you look, the more it seems choice and competition are playing a big role. As I noted last week, the increase in high-deductible, employer-provided health insurance — frequently paired with a health savings accounts — are one likely cause.

Another candidate can be found in the CBO’s recently updated budget forecast. The budget scorekeeper dropped its 10-year cost for Medicare by $137 billion. Here’s why, according to the CBO: “The largest downward revision in the current baseline is for spending for Medicare’s Part D (prescription drugs).” Indeed, 75% of that decline, notes economist and AEI visiting scholar James Capretta, was due to the drop in expected Medicare drug benefit spending. Moreover, actual 2012 spending was 40% below what was projected in 2007. And over the last two years, “CBO has dropped the expected cost of the drug benefit over the eight-year period from 2013 to 2020 by nearly $250 billion, or 33%.”

What’s going on with Medicare Part D? Capretta:

And this is occurring in a program run entirely through private insurance plans competing with each other for enrollment among Medicare beneficiaries. Naysayers continue to argue that this cost experience has nothing to do with consumer pressure—it’s all supposedly due to the transition from branded drugs to generics. But what’s driving seniors out of branded drugs? It’s the design of the drug benefit being offered by the private plans. Those plans are offering seniors low-premium products with strong incentives for generic substitution, and—surprise, surprise—seniors are readily taking them up on the offer. It turns out that Medicare beneficiaries are just as eager to save on their monthly insurance premiums as everyone else in America. It’s just that this is the first time in the history of Medicare that they have been given the opportunity to cut their expenses by signing up with lower-cost options.

More evidence that injecting market forces throughout Medicare, as would be done with premium support reform, stands a good chance at reducing costs without hurting the quality of care.