When Congress was debating the Medicare drug benefit in 2003, there were many who advocated that Medicare provide the benefit as part of the traditional hospital insurance program. This was expected to save money both due to lower administrative costs and also as result of Medicare's ability to use its market power to directly negotiate lower prices with the pharmaceutical industry. The plan that was passed instead required beneficiaries to purchase insurance from private insurers who would be subsidized by the government.
It has been widely noted that the drug benefit has cost considerably less than expected. In 2011, the benefit cost $67.4 billion, just 51.3 percent of the originally projected cost. While advocates of using private insurers have claimed that lower-than-projected costs vindicate their design for the benefit, in fact the main reason that costs have been less than projected is that drug costs in general have risen much less rapidly than had been projected. This issue brief looks at the main factor behind slower-than-projected costs and how the United States can lower spending by negotiating drug prices.