Tara O'Neill Hayes June
20, 2018
Executive Summary
A recent report from the U.S. Department of
Health and Human Services (HHS) found that prices for brand-name prescription
drugs in Medicare Part D increased significantly between 2011 and 2015. During
that period, several policies included in the Affordable Care Act (ACA) were
implemented and either reduced drug manufacturer revenues or increased the cost
of selling drugs. These policy shifts may explain much of the observed price
increases.
- The ACA both expanded the Medicaid program and
increased by 53 percent the mandatory rebate that drug manufacturers must
provide for all Medicaid beneficiaries; consequently, drug manufacturers
paid an estimated $80 billion in rebates between 2011 and 2015.
- The ACA required drug manufacturers to begin rebating
50 percent of the price of all brand-name drugs provided in the Medicare
Part D coverage gap; these rebates cost the industry $19 billion during
that period.
- The ACA expanded the 340B prescription drug discount
program dramatically and the value of drugs subject to the program’s
mandatory discount nearly doubled from $6.4 billion in 2011 to $12 billion
in 2015.
- A
new tax that the ACA imposed on all manufacturers and importers of
brand-name prescription drugs cost the industry $14.1 billion over those
five years.
Nevertheless, data from recent years indicate
that drug prices may be leveling off.
Introduction
A majority of Americans are concerned about the
cost of medicines in the United States, and understandably so, as a number of
reports have come out over the last few years documenting sustained price
growth.[1] The
HHS Office of the Inspector General (OIG) published one such report recently
detailing increases in costs for brand-name Part D drugs between 2011 and 2015.[2] The
report highlights several notable points: 1) Total reimbursement for these
drugs increased 77 percent, despite a 17 percent decrease in utilization; 2)
After accounting for manufacturer rebates, reimbursement for these drugs
increased 62 percent; and 3) The percentage of Part D beneficiaries with annual
out-of-pocket (OOP) costs of at least $2,000 for brand-name drugs nearly
doubled.
These findings on their own, however, do not
tell the whole story of the price increases. Several ACA policies implemented
during this period either caused or influenced these price increases. For
policymakers to avoid exacerbating the problem, they must understand the policy
environment driving these increases and analyze proposed remedies in light of it.
Recently Implemented Policies Impacting the
Price of Drugs
The ACA included many provisions that either
directly or indirectly impacted the cost of medicines. Most significantly, the
ACA provided states the option to expand their Medicaid programs to childless adults
earning up to 133 percent of the federal poverty level (FPL). Thirty states
expanded their Medicaid programs by the end of 2015, resulting in 14.5 million
new enrollees.[3] Drug
manufacturers, as a condition of having their drug covered by Medicaid, are
required by law to offer Medicaid the “best price” available to any other payer
or provide a fixed rebate, determined as a percentage of the
drug’s price, whichever is greater. The ACA also extended this requirement to
Medicaid managed care organizations (MCOs) and increased the rebate amount for
brand-name drugs by 53 percent up to 23.1 percent.[4] Thus,
drug manufacturers became obligated to provide their drugs for roughly
three-quarters of the price to nearly a quarter of the U.S. population.
The result was predictable: a sharp increase in
the value of manufacturers’ rebates. In FY2010, Medicaid drug rebates equaled
42 percent of gross Medicaid drug costs. [5] Following
the ACA’s changes, rebates grew each year as a percentage of expenditures, and
by FY2013, Medicaid rebates equaled nearly 63 percent of the program’s gross
drug costs.[6] From
2011 to 2013, Medicaid drug rebates totaled $40 billion, according to the
Congressional Research Service (CRS)—yet even this sum might have been an
underestimate.[7] An
OIG report estimated that Medicaid drug rebates totaled $16.7 billion in 2012,
$3.3 billion more than reported by CRS that.[8] Data
for rebates paid in 2014 and 2015 were unable to be found, but in FY2016,
Medicaid spent $30 billion on drugs after collecting more than $31 billion in
rebates for prescription drugs, showing that the dollar value of rebates
roughly doubled in a just a few years.[9]In
sum, based on the trends in the available rebate data as well as net Medicaid
spending on drugs reported in the National Health Expenditure data, it is
estimated that from 2011 to 2015 drug manufacturers provided rebates to the
Medicaid program of approximately $80 billion.[10]
Next, the ACA mandated, in its effort to “close
the coverage gap,” that drug manufacturers pay rebates of 50 percent for all
brand-name drugs provided to Medicare Part D beneficiaries in the coverage gap
phase of their prescription drug benefit. Between 2011 and 2015, these
mandatory rebates cost drug manufacturers $19 billion, and another $5.6 billion
in 2016, as the chart below shows.[11] The Bipartisan Budget Act increases the
rebate percentage to 70 percent beginning in 2019 and also extends its
application to biosimilar medicines, which will increase the cost of these
rebates even further.
Third, the ACA expanded the eligibility
requirements of the 340B drug discount program (explained in detail here). Between January 1, 2005, and the day
the ACA was signed into law, less than 4,000 entities participated in the 340B
program; between January 1, 2011, and December 31, 2015, more than 19,200
health care facilities registered as new 340B sites.[12] Similar
to the Medicaid Drug Rebate Program, pharmaceutical companies are required by
law, as a condition of participation in other federal programs, to provide
medicines to eligible patients at 340B sites at or below a statutorily
determined ceiling price. As a result of the program’s enormous expansion, the
dollar value of sales under the 340B program nearly doubled between 2011 and
2015, from $6.4 billion to $12 billion, and climbed another 35 percent to $16.2
billion in 2016.[13]
Each of these policies either expanded the
number of individuals for whom drug manufacturers were required to provide
substantial discounts or increased the amount of the discount which must be
provided, or both. To make up for the lost revenue, manufacturers likely raised
their prices.
Another provision in the ACA directly increased
drug manufacturers’ costs. The ACA imposed a new tax on pharmaceutical
companies based on the sales revenue of a company’s brand-name drugs.[14] This
tax on brand-name drug sales cost the industry $14.1 billion between 2011 and
2015 and has cost another $11.1 billion since.[15] This
tax likely also contributed to rising prices, as it is not uncommon for
companies to pass the cost of a tax on to their customers.
The timing of the study is also noteworthy when
considering the OIG’s findings on the impact to beneficiaries’ out-of-pocket
expenditures. The second half of the ACA’s provision to close the coverage gap
involved increasing insurer liability while simultaneously decreasing patient
cost-sharing for drugs in the coverage gap. This change was implemented
gradually, beginning in 2011, and will be fully phased-in by 2020. By 2015, the
end of the OIG’s analysis, this policy had not yet reached the 50 percent
implementation point. Patient cost-sharing for brand-name drugs in the coverage
gap in 2015 was 45 percent; by next year, it will be only 25 percent. High-cost
Medicare beneficiaries’ total OOP expenditures are expected to be less than 4
percent higher next year than what they were in 2015.
Data from Past Two Years Veers from Trend Found
in OIG Report
Data from the two years since the OIG report was
conducted indicate the trend from 2011-2015 of ever-higher prices may be
leveling off. Net prices for brand-name drugs still under patent protection
increased roughly 9 percent in both 2011 and 2012, but only 3.5 percent in 2016[16] and
1.9 percent on average in 2017, below the rate of inflation.[17]
Further, most patients continue to face very
little cost-sharing. Data published by the Centers for Medicare and Medicaid
Services (CMS) in 2016 found that high-cost drugs are taken by an
incredibly small number of patients; only one percent of all Medicare
beneficiaries took a drug with total annual costs over $10,000 in 2014. In
fact, average patient OOP costs were lower in 2016 than in 2013 for both
brand-name drugs and generics.[18] Of
all the prescription drugs taken by patients in the United States last year, 80
percent were provided for less than $10 in OOP costs to the patient; 98 percent
had cost-sharing of less than $50.[19]
Conclusion
An analysis from PricewaterhouseCoopers
estimated that, as a result of changes that the ACA made to the prescription
drug market, brand-name pharmaceutical manufacturers would suffer a net loss of
$140 billion from 2012 to 2021.[20] The
above findings indicate that these provisions have already cost the industry
roughly that much, if not more. It should not be surprising that the price of a
good increased following multiple, significant government-imposed cost
increases on the manufacture and sale of that good. That said, these cost
increases certainly do not justify every price increase. Some drugs have
experienced astronomical price increases and have appropriately been targeted
for criticism.
Nevertheless, any discussion of policy remedies
to decrease drug prices must take into account how the ACA’s policy changes
increase costs. If policies aimed at bringing down drug prices fail to take the
impact of these existing policies into consideration, they will likely fail to
bring costs down meaningfully.
[3] https://www.medicaid.gov/medicaid/program-information/downloads/december-2015-enrollment-report.pdf
[9] https://www.macpac.gov/wp-content/uploads/2015/11/EXHIBIT-28.-Medicaid-Gross-Spending-and-Rebates-for-Drugs-by-Delivery-System-FY-2016-millions.pdf
[10] https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nationalhealthaccountshistorical.html
[11] https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2017-Press-releases-items/2017-01-13.html
[14] Section 9008 of the Patient Protection and
Affordable Care Act http://housedocs.house.gov/energycommerce/ppacacon.pdf
[15] https://www.irs.gov/affordable-care-act/annual-fee-on-branded-prescription-drug-manufacturers-and-importers
[17] Download full report at: https://www.iqvia.com/institute/reports/medicine-use-and-spending-in-the-us-review-of-2017-outlook-to-2022
[19] https://www.iqvia.com/institute/reports/medicine-use-and-spending-in-the-us-review-of-2017-outlook-to-2022
[20] https://www.pwc.com/us/en/health-industries/health-research-institute/publications/pdf/implications-of-the-US-Supreme-Court-ruling-on-healthcare.pdf
https://www.americanactionforum.org/insight/understanding-the-policies-that-influence-the-cost-of-drugs/#ixzz5J4G8ILbh
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Different considerations that organizations need to remember while determining the cost of a medication are the market, rivalry, patent life, and the worth of the medication. Pharma organizations can utilize one of many evaluating strategies like expense based estimating, contest based estimating, and worth based valuing.
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