Policy Proposals

Mending the Medicare Prescription Drug Benefit: Improving Consumer Choices and Restructuring Purchasing

April 2, 2007
Health Care

The Problem

Prescription drugs are a critical tool to help elderly Americans manage chronic illnesses. Until recently, however, Medicare provided no insurance for most outpatient prescription drugs. In 2006 Medicare Part D began offering subsidized prescription drug insurance via a complex system that unfortunately features perverse incentives for insurance companies, inefficiencies that drive up costs, and partial coverage that leaves many seniors facing financial risks.

The Proposal

Key improvements to the Medicare Part D system would offer considerable benefits to American seniors, eliminating confusion and guaranteeing coverage. Recommendations include limiting the number of drug plans, introducing default enrollment, increasing competition, reducing incentives for companies to avoid high-cost seniors, adopting best-price rules, and offering greater deductibles in exchange for greater coverage.


The Part D prescription drug benefit has brought affordable drug coverage to millions of elderly Americans and is a valuable addition to Medicare. But several reforms are needed. To reduce complexity while retaining adequate choice, a set of standardized plans should be created within Part D.

New participants should be automatically enrolled in a plan but allowed to opt out. To encourage price competition and discourage adverse selection, Medicare should allow competition for exclusive contracts to sell the standardized plans in each Part D region. To address the stresses on the federal budget, prices paid for drugs purchased on behalf of beneficiaries previously covered by Medicaid should be reduced to near their former Medicaid levels. To limit the ability of manufacturers to name their prices of therapeutically unique drugs, a standby mechanism for establishing temporary administered prices should be developed. Finally, the confusing distinction between Part B and Part D drugs should be ended and all prescription drugs covered under Part D.