Potential Savings on Medicare Part D from Lower Drug Prices

January 31, 2017

CEPR

Four years ago, we calculated the potential savings to the federal and state governments, as well as beneficiaries, from lower drug prices. In the paper, Reducing Waste with an Efficient Medicare Drug Benefit, we compared how much people in the United States paid for drugs with payments in other wealthy countries. We then calculated how much the federal and state governments, as well as beneficiaries, would save on the Medicare prescription drug benefit if we paid the same amount for drugs as people in other countries.

The calculation had low and high savings scenarios. In the low savings scenario, it was assumed people in the United States would pay as much for prescription drugs as in Canada, the highest country in the group. This involved savings of 27.8 percent on drugs, since Canadians pay on average 72.2 percent as much as people in the United States. The high savings scenario was based on drug payments in Denmark, which are on average 34.5 percent as high as in the United States, implying a savings of 65.5 percent.[1]

The tables below update these calculations based on the projections of spending on Medicare Part D from the 2016 Medicare Trustees Report (Table III.D3, p.107).[2] Table 1 shows the projections for spending on prescription drugs covered by Medicare Part D over the next decade by the federal government, state governments, and beneficiaries.

Table 1: Projected Spending (billions of dollars)
Year	Beneficiaries	Federal Government	States
2017	$17.7	$77.8	$10.6
2018	$22.2	$90.8	$11.5
2019	$25.3	$97.8	$12.7
2020	$28.4	$107.0	$14.2
2021	$30.0	$115.5	$15.7
2022	$33.1	$124.1	$17.1
2023	$35.9	$134.0	$18.5
2024	$39.0	$144.4	$20.0
2025	$41.8	$153.7	$21.6
2026	$44.8	$163.6	$23.3
2027	$48.0	$174.1	$25.2
Source: 2016 Medicare Trustees Report, Table III.D3 (p. 107).

Table 2 shows the savings if we paid the amount for prescription drug as people in Canada.

Table 2: Low Savings — Canadian Spending (billions of dollars)
Year	Savings to Beneficiaries	Savings to Federal Government	Savings to States
2017	$4.6	$20.2	$2.8
2018	$5.8	$23.6	$3.0
2019	$6.6	$25.4	$3.3
2020	$7.4	$27.8	$3.7
2021	$7.8	$30.0	$4.1
2022	$8.6	$32.3	$4.4
2023	$9.3	$34.8	$4.8
2024	$10.1	$37.5	$5.2
2025	$10.9	$40.0	$5.6
2026	$11.6	$42.5	46.1
2027	$12.5	$45.3	$6.5
Total	$95.2	$359.4	$49.5
Source: 2016 Medicare Trustees Report, Table III.D3 (p. 107).

In this scenario, savings to beneficiaries would rise to $12.5 billion annually by 2027, bringing total savings through 2027 to $95.2 billion. Savings to state governments would total $49.5 billion, while the federal government could save $359.4 billion.

Table 3 shows the potential savings if we paid the same amount per person for drugs as people in Denmark, the low-cost country in the group.

Table 3: High Savings — Danish Spending (billions of dollars)
Year	Savings to Beneficiaries	Savings to Federal Government	Savings to States
2017	$12.5	$54.9	$7.5
2018	$15.7	$64.1	$8.1
2019	$17.9	$69.0	$9.0
2020	$20.0	$75.5	$10.0
2021	$21.2	$81.5	$11.1
2022	$23.4	$87.6	$12.1
2023	$25.3	$94.6	$13.1
2024	$27.5	$101.9	$14.1
2025	$29.5	$108.5	$15.2
2026	$31.6	$115.5	$16.5
2027	$33.9	$122.9	$17.8
Total	$258.5	$976.2	$134.4
Source: 2016 Medicare Trustees Report, Table III.D3 (p. 107).

In this scenario, the savings to beneficiaries would rise to $33.9 billion in 2027, with total savings of $258.5 billion. The cumulative savings to state governments over this period would be $134.4 billion, while the federal government would save $976.2 billion.

While these calculations are obviously rough approximations, they show the potential size of the savings if people in the United States could get drugs at prices that are comparable to prices in other wealthy countries. The potential savings in this area are much larger than the sums at stake in most other policy debates.

[1] The calculations are based on average spending on drugs rather than comparing drug prices, since the mix of drugs that people use depends in part on their price. The implicit assumption is that we could get the same quality of care in the United States with the mix of drugs used Canada or Denmark.

[2] A full explanation of the methodology can be found in the earlier paper.