States copying market-based Medicare plan

How do you know a federal government program is working? When states start using it as a model for their own initiatives.

That's exactly what's happening with Medicare Part D, the prescription drug program for seniors. States are incorporating its unique market-based structure into their own health-care programs to expand access and manage costs.

Under Medicare Part D, seniors select their prescription coverage from a host of private insurers vying for their business. States are now applying that principle of free-market competition to their Medicaid programs, and the results have been excellent.Kansas, Louisiana, and Florida have received federal waivers that allow them to experiment with providing Medicaid services through private insurers. The states pay a fixed amount to insure each Medicaid enrollee, and then set minimum benefits that plans must provide.But it's private insurers that actually supply the plans, and it's the enrollees themselves who decide which plan they would like. As a result, insurers can't provide the bare minimum - Medicaid enrollees can easily select a more appealing plan based on their own needs and their own choice.

The results have been impressive.

When Florida recently ran a pilot program, participating counties outperformed others 64 percent of the time on measured health outcomes. In Louisiana, where those with private insurance have the option of returning to the state's traditional Medicaid program, only one-third of 1 percent have chosen to do so. And because these states expect to save money, other states, including North Carolina, Texas, and Utah, are now considering similar policies.

And these programs don't just promise to save money; they feature various innovations to ensure quality. For example, in Florida, insurers are required to conduct customer-satisfaction surveys. Some states have increased the amount they will pay for coverage of high-risk patients, giving insurance companies an incentive to cover these patients and keep them healthy. This type of risk-based pricing helps patients receive more preventive care, according to a report last year by the Urban Institute.

Nationwide, 36 states and the District of Columbia provide at least some of their Medicaid services through private insurers - and these programs are expected to grow as the new health-care law expands access to Medicaid. States already spend up to one-third of their budgets on Medicaid, so an opportunity to save money while providing better service is an obvious win.

All of this is exciting - but it's not surprising, at least not to those who are familiar with the success of Medicare Part D. By letting seniors choose among private drug plans, Part D has cost the government about 45 percent less than initially projected when Congress enacted the program in 2003.

Out-of-pocket expenses for seniors are also lower than expected. And in a recent survey, 90 percent of Part D beneficiaries said they were satisfied with the program.

Given Medicare Part D's success in its own right and as a model for other healthcare programs, it's bizarre that President Obama and some in Congress would like to undermine the competition that makes Part D work.

The president's most recent budget, as well as bills introduced in Congress by Sen. Jay Rockefeller (D., W.Va.) and Rep. Henry Waxman (D., Calif.), would require drug companies to give "rebates" to the government for the drugs purchased for low-income seniors - known in technical parlance as "dual eligibles" because they qualify for both Medicare and Medicaid.

To put it simply, these politicians would substitute government price controls for the competitive marketplace that has been so effective in keeping costs down. As the Congressional Budget Office (CBO) has reported, the private plans provided through Part D are already negotiating low prices for drugs. Requiring drug makers to instead sell their products for below-market prices will force manufacturers to raise prices on other consumers, including most seniors. Such rebates could increase seniors' premiums by 40 percent, according to a study by former CBO director Douglas Holtz-Eakin.

States may be the laboratories for innovation, but the big lesson from Part D is clear:

Competition among private insurers reduces costs and encourages better health care. Some states are learning this lesson and applying it to their Medicaid programs. The federal government should be encouraging this market-based reform, not trying to undermine it.
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