Premiums have risen very little in the years since
Medicare Part D was introduced. But the same cannot be said of the burden on
taxpayers.
By Austin Frakt
Aug.
13, 2018
At a glance,
Medicare’s prescription drug program — also called Medicare Part D — looks like
the perfect example of a successful public-private partnership.
Drug benefits are
entirely provided by private insurance plans, with generous government
subsidies. There are lots of plans to
choose from. It’s a wildly popular voluntary program,
with 73 percent
of Medicare beneficiaries participating. Premiums have exhibited little
to no growthsince the program’s inception in 2006.
But the stability in
the premiums belies much larger growth in the cost for taxpayers. In 2007, Part
D cost taxpayers $46 billion. By 2016, the figure reached $79 billion, a 72
percent increase. It’s a surprising statistic for a program that is often
praised for establishing a competitive insurance market that keeps costs low,
and that is singled out as an example of the good that can come from strong
competition in a private
market.
Much of this increase
is a result of growing enrollment — it
has doubled in the past decade to 43 million — and higher drug
prices. But there is also a subtle way in which the program’s structure
promotes cost growth.
When enrollees’ drug
costs are relatively low, plans pay
a large share, typically about 75 percent. But when enrollees’ drug
spending surpasses a certain catastrophic threshold — set at $5,000 in
out-of-pocket spending in 2018 — 80 percent of drug costs shifts to a
government program called reinsurance. This gives people in charge of private
insurance plans an incentive to find ways to push enrollees into the
catastrophic range, shifting the vast majority of drug costs off their books.
For example, they could be less motivated to negotiate for lower drug prices
for certain types of drugs if doing so would tend to keep more enrollees out of
the catastrophic range.
Reinsurance spending,
which is not reflected in premiums, has been rising rapidly.
“This harms the very
competition that Part D was supposed to establish,” said Roger Feldman, an
economist at the University of Minnesota. Consumers are naturally attracted to
lower-premium plans, but choosing them increasingly shifts higher costs onto
taxpayers if plans achieve those lower premiums in part by shifting more drug
expenses onto the government’s books.
Documenting
this is
a recent study by Mr. Feldman and Jeah Jung of Penn State
University that was published in Health Services Research. The study found that
the disconnect between premiums and reinsurance costs has increased over time.
Additionally, insurance company plans exhibiting less of an effort to manage
the use of high-cost drugs had higher reinsurance costs. This is consistent
with incentives to encourage enrollees into the catastrophic range of spending.
The Medicare Payment
Advisory Commission has been warning about this problem for several years in
its annual reports to Congress. According
to MedPAC, between 2010 and 2015, the number of enrollees entering
the catastrophic drug cost range grew 50 percent, from 2.4 million to 3.6
million, now accounting for 8 percent of enrollees.
“It’s ironic for a
program supposedly built on market principles,” said Mark Miller, a former
MedPAC director. “You wouldn’t see this kind of thing in the commercial
market.” For commercial market insurance products — such as those offered by
employers or in the health insurance marketplaces — only about 1
percent of policyholders reach a catastrophic level of
expenditures at which reinsurance kicks in. (Mr. Miller and I are co-authors
of an
editorial about Ms. Jung’s and Mr. Feldman’s study, which also
appears in Health Services Research.)
Reinsurance is the
fastest-growing component of Medicare’s drug program, expanding at an 18
percent annual rate between 2007 and 2016. In 2007, it accounted for 17 percent
of government spending for Part D. In 2016 it was 44 percent.
The Affordable Care
Act hastened
this growth. The law requires pharmaceutical manufacturers to pay
some of the cost of the drug benefit. (The Bipartisan Budget Act of 2018
further increased how much manufacturers must contribute.) For the purposes of
reaching the catastrophic threshold and triggering reinsurance, these industry
contributions count as out-of-pocket payments for enrollees, even though they
are not.
That means enrollees
don’t have to spend as much as they otherwise would to trigger the reinsurance
program. Although this is of great benefit to enrollees, it also pushes up
taxpayer liability for the program.
Changing the extent
to which manufacturer’s contributions count as enrollee out-of-pocket spending
is one potential reform of the program. Other solutions include increasing the
liability of insurance company plans in the catastrophic range and decreasing
the liability of taxpayers.
This would have the
effect of bringing premiums more in line with program spending. Doing so would
“return Part D to the market-based program it was intended to be,” Ms. Jung said.
As it stands, there is a substantial divide between what Part D was billed as
and what it actually is.
Austin Frakt is director of the Partnered Evidence-Based Policy
Resource Center at the V.A. Boston Healthcare System; associate professor with
Boston University’s School of Public Health; and adjunct associate professor
with the Harvard T.H. Chan School of Public Health. He blogs at The
Incidental Economist. @afrakt
A
version of this article appears in print on Aug. 13, 2018, on
Page B3 of the New York edition with the headline: The
Large Hidden Costs Of Medicare’s Drug Program.
https://www.nytimes.com/2018/08/13/upshot/medicare-part-d-hidden-cost-problem.html
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