Tara O'Neill Hayes February 5, 2020
United States House of Representatives Committee
on Ways and Means Subcommittee on Health
* The views expressed here are my own and not those of the
American Action Forum.
Chairman Doggett, Ranking Member Nunes, and
members of the committee, thank you for the opportunity to testify today on the
matter of drug prices and access to medications. I hope to make four basic
points:
1.
Medicare Part D
represents nearly one-third of all drug spending in the United States, meaning
reform to the program could impact the rest of the pharmaceutical market, and
all of the major policy proposals as well as the president’s budget include a
redesign of the Medicare Part D benefit structure.
2.
The current structure of
Medicare Part D’s benefit design, along with pricing incentives in the broader
pharmaceutical market, create perverse incentives for insurers and drug
manufacturers to benefit from high-cost drugs. These incentives have resulted
in a rapid increase in spending in the catastrophic phase of the Part D program
over the past decade, exposing taxpayers and high-cost beneficiaries to
ever-increasing costs.
3.
Under current law, the
mandatory discount decreases (as a proportion of the drug’s price) as the price
increases. To counter this undesirable effect, each of the proposals currently
under consideration instead require manufacturer rebates in the catastrophic
phase, ensuring the mandatory discount increases along with a drug’s price.
Insurer liability is also increased significantly in the catastrophic phase
under each proposal. Both of these changes should put downward pressure on drug
prices.
4.
Each proposal would also
establish an out-of-pocket maximum for beneficiaries and reduce the
government’s open-ended insurance liability, providing greater protection to
beneficiaries and taxpayers. I calculate that, in 2022, H.R. 19 could save the
federal government $28.3 billion in reinsurance payments and beneficiaries more
than $10.6 billion in out-of-pocket costs, while insurer liability would
increase by $33.7 billion and drug manufacturer liability would increase by
$5.2 billion.
Let me discuss these further.
Introduction
Over the past few years, members of Congress
have put forward many policy proposals to lower
prescription drug costs.[1] While
many policies have gained broad support, few are as transformative as proposals
to reform the Medicare Part D benefit structure. Part D reforms are also of
particular importance as they are the only major policy reforms that each of
the major legislative packages and the president’s fiscal year 2020 budget
include.
Since Medicare Part D’s inception, Republicans,
Democrats, and beneficiaries alike have hailed the program as a rare success
among government programs. The program has provided millions of seniors access
to prescription drugs at a budgetary impact equaling only half of what was
projected.[2] But
nearly 15 years after its implementation, the program’s costs and the
prescription drug market have changed. The emerging trends highlight the need
to reform the program in order to account for these changes.
Congress should amend the benefit design to
provide beneficiaries an out-of-pocket (OOP) cap; reduce taxpayer exposure by
reducing the government’s reinsurance liability; increase insurers’ incentive
to control drug costs by increasing their liability throughout the benefit; and
decrease drug manufacturers’ incentive for higher prices by requiring them to
pay a share of the catastrophic phase’s costs, lifting the existing cap on
their liability for drug costs. Each of the major drug-focused legislative
packages that Congress is considering—H.R. 3 from Speaker Pelosi and the House
Democratic Caucus, S. 2543 from the Senate Finance Committee, H.R. 19 from the
House Republican leaders of the Ways and Means, Energy and Commerce, and
Education and Labor Committees, as well as S. 3129 from Senators Burr, Crapo,
Enzi, and Tillis—includes such reforms.[3]
If the reforms described here are successful in
reducing costs in Medicare Part D, such reforms could impact the broader drug
market. In 2018, total expenditures in Medicare Part D neared $100 billion.[4] Total
prescription drug spending in the United States was $335 billion.[5] Medicare
Part D therefore represents 30 percent of the country’s total prescription drug
market and more than 8 percent of the global pharmaceutical market.[6]
The Need for Reform
Rising Reinsurance Costs
At the program’s outset in 2006, reinsurance
costs accounted for 26 percent of the government’s overall Medicare Part D
subsidy. By 2018, reinsurance costs had climbed to 73 percent of the program’s
subsidy, surpassing $40 billion.[7] This
shift has dramatically increased taxpayers’ financial exposure, putting the
program on an unsustainable path. Between 2007 and 2017, premium subsidies
decreased by 1.8 percent per year while reinsurance payments increased by 16.7
percent per year, on average.[8]
While rising drug spending itself is, of course,
partially to blame for the increasing reinsurance costs, structural changes
made to the program are also significant contributors. The Patient Protection
and Affordable Care Act included two provisions that made significant changes
to the Part D program: the Coverage Gap Discount Program—otherwise known as
“closing the coverage gap” (or the “donut hole”)—and a temporary slowing of the
catastrophic threshold’s growth rate.
The Coverage Gap Discount Program required drug
manufacturers to pay 50 percent of the costs of any drug a beneficiary takes
while he or she is in the coverage-gap portion of the benefit phases. These
manufacturer payments count toward the beneficiary’s true out-of-pocket (TrOOP)
cost calculation, which in turn determines when the beneficiary moves from one
phase of the benefit to the next. Including manufacturer’s payments in this
calculation results in beneficiaries moving through the benefit phases and into
the catastrophic phase much more quickly than they otherwise would.
The temporary slowdown in the growth rate of the
catastrophic threshold also led to more beneficiaries reaching the catastrophic
phase and doing so after less spending than they would have absent this change,
as can be seen below.
The growth rate of the catastrophic coverage
threshold has now returned to normal, but a provision included in the Balanced
Budget Act of 2018 (BBA) exacerbates the problem of rising reinsurance
expenditures: The BBA increased manufacturer liability in the coverage gap to
70 percent while decreasing insurer liability to 5 percent.
The increase in manufacturer liability
exacerbates the existing TrOOP problem, while the decrease in insurer liability
significantly diminishes insurers’ incentive to control costs for high-cost
enrollees. Insurers in 2017 were at risk for only 46 percent of the benefit
costs, down from the expected 75 percent rate in 2007.[9] In
fact, the BBA reduced insurer liability so substantially that for a beneficiary
who reaches the catastrophic threshold in 2020 taking exclusively brand-name or
biosimilar drugs, the insurer’s cost at this point ($2,974) is about $700 less
than the drug manufacturer’s ($3,698).
Perverse Incentives Favor High-Priced Drugs
The structure of the current benefit design, as
well as the pricing incentives in the broader drug market, encourage insurers
to prefer coverage of high-price, high-rebate drugs, a preference that also
leads to more beneficiaries reaching the catastrophic phase. Because of the
BBA’s changes and the insurers’ varying liability for brand-name products (5
percent) versus generics (75 percent), it is now in insurers’ financial
interest to prefer a brand-name drug over a generic unless the generic is more
than 15 times less expensive than the brand-name product.[10] This
incentive may depress demand for generics, which could discourage generic
development, harming the broader market. Further, pharmacy benefit managers (PBMs)—working
on insurers’ behalf—have created a business model in which their revenue is
largely tied to the amount of rebates they are able to obtain from drug
manufacturers.[11] Drug
manufacturers provide greater rebates in order to secure preferred status on a
drug plan’s formulary, which increases sales of the preferred drug. The easiest
way to provide a larger rebate is to raise the price of the drug before the
rebate (list price). Insurers benefit from greater rebates because these
rebates, most often paid after the point-of-sale, can be used to reduce next
year’s premiums—the most important factor beneficiaries consider when deciding
in which plan to enroll.
The mandatory discounts that Part D requires of
drug manufacturers in the coverage gap also encourage higher drug prices.
Because the coverage gap is in the middle of the benefit structure, only a
finite amount of spending is subject to the discount, resulting in a maximum discount that manufacturers will
owe.[12] Under
current law, the maximum discount a drug manufacturer will have to pay in 2022
is $4,136. Any manufacturer with a drug costing $10,399 or more will have to
pay this discount. For a drug costing $10,399, this discount represents a
discount of 40 percent. For a drug costing $50,000, this maximum discount will
only equal 8.3 percent of the drug’s price. Thus, the current structure is more
punitive to manufacturers of lower-cost drugs and encourages higher prices.
Further, patients who pay coinsurance based on
the list price are substantially worse off when list prices rise. Also, because
the rebates are used to reduce premiums for everyone, rather than simply
reducing the high OOP costs paid by the patients taking the drug for which the
rebate was paid, the beneficiaries with higher costs end up subsidizing those
with lower costs—the opposite of how insurance is supposed to work. Taxpayers,
who subsidize 75 percent of the program, are also worse off when program costs
increase. Thus, higher-price, high-rebate drugs are beneficial to each of the
industry stakeholders but increase costs for both patients and taxpayers.
High-Cost Enrollees’ Financial Burden
The financial burden for enrollees reaching the
catastrophic phase can be quite significant. In 2010, 2.4 million beneficiaries
reached the catastrophic phase, and 33,000 beneficiaries did so after filling a
single prescription.[13] In
2016, more than 3.6 million beneficiaries reached the catastrophic phase and
more than 370,000 did so after a single prescription fill.[14] These
beneficiaries had average spending between $20,899 (those with the low-income
subsidy, or LIS) and $29,797 (non-LIS).[15] Beneficiaries
who do not receive the LIS are responsible for 5 percent of all costs in the
catastrophic phase, meaning the average non-LIS high-cost enrollee incurred
more than $4,000 in OOP costs in 2016, and that figure will increase each year,
particularly as more expensive specialty medicines are developed. Specialty
drugs now account for 25 percent of Part D spending, approximately four times
more than in 2010.[16]
Redesigning the Benefit to Realign Incentives
One possible reform to address these various
problems would involve reconfiguring the liabilities within the Part D
structure. These changes include placing a true cap on beneficiary OOP
expenditures, eliminating the coverage gap phase entirely and instead requiring
drug manufacturers to pay rebates during the catastrophic phase, reducing the
federal government’s reinsurance rate, and increasing plans’ liability in the
catastrophic phase.[17]
Requiring drug manufacturers to pay discounts in
the catastrophic phase ensures that the amount they owe increases along with
the drug’s price, discouraging both high launch prices and price increases. The
current structure—which caps manufacturer liability as described above—results
in the mandatory discount being more punitive for lower-cost drugs, thus
encouraging higher prices.
Increasing insurer’s liability throughout the
benefit, and particularly in the catastrophic phase, increases insurers’
incentive to control costs and reduce the use of high-cost, high-rebate drugs.
Reducing the government’s reinsurance liability
reduces taxpayers’ exposure to rising costs.
Establishing an OOP cap provides beneficiaries
with financial protection, assuring them they will not face open-ended OOP
costs. More than a million beneficiaries could save hundreds or thousands of
dollars each year.
The following bills each include provisions to
reform the Medicare Part D benefit structure in a similar conceptual manner:
H.R. 3, H.R. 19, S. 2543, and S. 3129.[18] The
president’s FY2020 budget also included a proposal to redesign the benefit
structure, and while that proposal was conceptually different from the ideas
discussed here, the administration has since expressed support for this
conceptual framework.[19]
H.R. 19, the Lower Costs, More Cures Act
H.R. 19 provides Part D enrollees with a $3,100
OOP cap on prescription drug costs; reduces the government’s reinsurance
liability to 20 percent for all brand-name and biosimilar products and 30
percent for all generic products; increases insurer liability in the
catastrophic phase to 70 percent; and requires drug manufacturers to pay 10 percent
of all costs above the deductible for brand-name and biosimilar products. H.R.
19 also reduces beneficiaries’ coinsurance to 15 percent for brand-name and
biosimilar products in the initial coverage limit (ICL), reducing costs for
most enrollees with spending above the deductible.
Equalizing insurer liability for all products
throughout the benefit phases should eliminate insurers’ existing financial
incentive to prefer brand-name products over generics.
H.R. 19 would require drug manufacturers to provide
discounts for products that LIS beneficiaries take; under current law, rebates
are only required for non-LIS beneficiaries. In 2015, high-cost LIS enrollees
took 18 more prescriptions, on average, than high-cost non-LIS enrollees.[20] The
most common types of drugs taken by high-cost LIS enrollees are for mental
health, diabetes, HIV/AIDS, and pain, whereas high-cost non-LIS beneficiaries
most commonly take drugs for cancer, multiple sclerosis, rheumatoid arthritis,
and pulmonary hypertension. Current law therefore penalizes manufacturers of
drugs that predominantly non-LIS beneficiaries take. Requiring discounts for
all beneficiaries and throughout the benefit will help prevent manufacturers
from being hit disproportionately based on their product line.
Overall, H.R. 19 will make several important
changes to the structure of the Part D benefit which should put pressure on
both insurers and drug manufacturers to reduce drug costs and provide greater
financial protection to both patients and taxpayers. For the included reforms
to have maximum benefit, Congress should provide insurers with additional tools
and flexibility to better manage enrollees’ drug utilization. Further, because
these reforms would significantly increase insurer liability, regulatory
changes need to be made to recalibrate the program’s risk adjustment system in
order to protect against risk selection.
Analysis of H.R. 19 Compared to Current Law
The following tables illustrate the projected
stakeholder liability in 2022 for a drug costing $35,000 during each phase of
the benefit under current law and under H.R. 19. As the tables show, under
current law, taxpayers’ share of the costs are nearly three times greater than
insurers’.
Table 1: Current Law 2022 Liability by
Stakeholder for $35,000 Drug
H.R. 19 would significantly increase insurer
liability while greatly reducing taxpayer liability. Beneficiaries would save
nearly $1,300 in OOP costs. Manufacturer liability would be reduced by $1,400
in this instance, but, as noted before, if the drug’s price increased, so would
the manufacturer’s liability, whereas under current law, no such deterrent
exists.
Table 2: H.R. 19 2022 Liability by Stakeholder
for $35,000 Drug
Aggregate Stakeholder Liability
The following analysis examines the expected
aggregate effect of H.R. 19. This analysis is based on the latest data
available through the Centers for Medicare and Medicaid Services’ Drug Spending
Dashboard.[21] The
most recent drug spending and utilization data for Medicare Part D is from
2018. In order to calculate estimates of the effect of H.R. 19 relative to
current law in 2022—the year H.R. 19 would be implemented—this estimate assumes
utilization will increase by 16 percent (equal to the amount enrollment in Part
D is projected to increase during this period) and the average spending per
drug will increase 6 percent.
Limitations
This analysis is based on spending on individual
drugs for which per-beneficiary spending is high enough to trigger a rebate.
These estimates do not include rebates for drugs that have an average annual
cost per beneficiary that is lower than the rebate threshold, even though these
drugs could be provided after the beneficiary surpasses the threshold and a
rebate would be required. Conversely, these estimates do not exclude the many
drugs that may be generic products. Further, it is important to note that these
estimates do not account for any new drugs that have come to market or are
expected to come to market after 2018.
Findings
Given these assumptions and limitations, an
estimated 48 million beneficiaries will fill a prescription for which the
average spending per beneficiary is greater than the deductible, projected to
be $485 in 2022.[22] Total
spending for these 1,898 drugs will equal an estimated $166.1 billion.
The estimated liability for each stakeholder
during each coverage phase can be seen in the tables below. Table 3 shows the
liabilities under current law while Table 4 shows the estimates for H.R. 19.
Table 5 shows the totals side-by-side.
Table 3: Current Law Estimated 2022 Liability by
Stakeholder ($billions)
Table 4: H.R. 19 2022 Estimated Liability by
Stakeholder ($billions)
Relative to current law, the federal government
would be expected to save more than $28.3 billion in reinsurance payments,
under this analysis, as shown below. Beneficiaries are expected to save $10.6
billion in OOP costs. Insurers’ liability will increase more than $33.7 billion
and drug manufacturers’ liability will increase more than $5.2 billion. Of
course, the increase in insurer liability is likely to result in higher
premiums, which beneficiaries and the federal government will pay, offsetting
much—but not all—of their expected savings in the catastrophic phase.
Table 5: Current Law vs H.R. 19 Estimated 2022
Liability by Stakeholder ($billions)
Conclusion
The Medicare Part D Prescription Drug Program
has been highly successful, providing millions of seniors with access to
prescription drugs they would otherwise not be able to afford. Recent trends,
however, reveal the need for some structural reforms to ensure the program
continues to be successful in terms of access and affordability for both
patients and taxpayers. Restructuring the program’s benefit design in a way
that realigns incentives away from high-cost, high-rebate drugs may be the best
way to reduce overall program costs as well as drug prices in other parts of
the market.
[3] S. 1895 also includes many provisions
aimed at reducing drug prices but does not include language to reform the
Medicare Part D benefit structure because the Senate HELP Committee, which
drafted the legislation, does not have the jurisdiction to do so.
[4] https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2019.pdf
[5] https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet
[6] https://www.iqvia.com/insights/the-iqvia-institute/reports/the-global-use-of-medicine-in-2019-and-outlook-to-2023
[7] http://www.medpac.gov/docs/default-source/default-document-library/ma_vip_public_jan_2020.pdf?sfvrsn=0
[10] For low-income subsidy (LIS) enrollees,
the distortion is even worse because plans have no liability for such
beneficiaries in the coverage gap.
[11] https://www.americanactionforum.org/research/primer-prescription-drug-prices-discounts-fees-effects-part-d/
[12] https://www.americanactionforum.org/insight/the-impact-of-shifting-rebates-to-catastrophic-coverage-in-medicare-part-d/
[14] http://www.medpac.gov/docs/default-source/reports/jun19_ch2_medpac_reporttocongress_sec.pdf?sfvrsn=0
[19] https://www.modernhealthcare.com/government/top-white-house-adviser-says-hospital-price-transparency-rule-coming-soon
[21] https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Information-on-Prescription-Drugs/MedicarePartD
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